ANNUAL REPORT 2016

The impossible is solved by incredible people

HAND IN HAND WITH THE INCREDIBLE Our aim is Åsane to stimulate Bergen Sotra Fana growth and development ordlnd

Husnes Stord in the region.

Ølen

Sand Haugesund Aksdal Karmsund

Kopervik Åkrehamn Finnøy olnd

Jørpeland Randaberg Stavanger

Sola Sandnes

Klepp Ålgård Bryne Nærbø sder Varhaug esder Egersund Grimstad

Flekkeord

Kristiansand

Farsund Lyngdal Mandal

Aust-Agder and Rogaland Hordaland Vest-Agder

Population 470,000 516,000 298,000 Market shares 36% 6% 8% Established 1839 2006 2002

Hordaland Market strategy Market leader Growth market Growth market

Rogaland *Figures as at 31 December 2016 Aust-Agder Source: Statistics Norway and SpareBank 1 SR-Bank Vest-Agder It takes incredible people to create the impossible

Progress is IMPOSSIBLE without change, and those who cannot change their minds cannot change anything. The right attitude and belief that the sum of each action means something helps to create AMAZING results.

INCREDIBLE people never give up. They always test and challenge the known and the unknown in order to create the IMPOSSIBLE. It is only when they stop trying that they fail.

Hand in hand with the INCREDIBLE.

«The impossible», Gunnar Roalkvam

Contents

Key figures 4 Business areas 30 Group executive management 34 CEO’s article 6 Corporate governance 36 2016 Year in Review 8 Board of directors 42 SpareBank 1 SR-Bank ASA in brief 10 Group structure 13 Board of Directors’ report 44 People and companies in Southern and Western Norway 14 Annual financial statements - contents 57 The SR-Bank share 18 Corporate social responsibility (CSR) 21 Key figures last 5 years 134 Our employees 26 4

Highlights

(Figures in NOK millions) 2016 2015

Net interest income 2,871 2,593 Net commissions and other operating income 1,443 1,532 Net income from financial investments 654 304 Total operating costs before impairment losses on loans 2,032 1,863

Operating profit before impairment losses on loans 2,936 2,566

Impairment losses on loans and guarantees 778 420

Pre-tax profit 2,158 2,146

Key figures 2016 2015 Profitability Return on equity % 10.0 10.8 Cost/income ratio 40.9 42.1 Average interest margin % 1.48 1.42

Balance sheet figures Gross loans to customers 157,638 155,190 Gross loans to customers, incl. SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt 182,332 183,896 Deposits from customers 85,914 89,444 Lending growth, incl. SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt -0.9% 5.4% Deposit growth -3.9% 9.8% Total assets 31 Dec 193,408 192,049

Financial strength Common equity tier 1 capital ratio % 14.7 13.3 Tier 1 capital ratio % 15.6 14.2 Capital ratio % 17.5 16.7 Leverage ratio % 7.3 6.3 Tier 1 capital 18,227 16,882

Liquidity Liquidity coverage ratio (LCR) % 174 128

Branches and staffing No. of full-time equivalents, incl. temps 1,172 1,190 No. of branches 36 49

The SpareBank 1 SR-Bank share Market price at year end 60.75 39.30 Earnings per share 6.87 6.83 Dividend per share 2.25 1.50 Effective yield on share % 58.4 -21.3

Please also refer to the complete review of key figures and definitions on pages 20 and 130. 5

GROUP PRE-TAX PROFIT: NET INTEREST INCOME: 2,158 2,871 NOK million (2,146 million) NOK million (2,593 million)

RETURN ON NET COMMISSIONS AND EQUITY AFTER TAX: OTHER OPERATING INCOME: 10.0 1,443 % (10.8%) NOK million (1,532 million)

GROWTH IN LENDING, GROSS LAST IMPAIRMENTS AS % OF GROSS 12 MONTHS, INCL. SB1 BOLIGKREDITT LOANS, INCL. SB1 BOLIGKREDITT AND SB1 NÆRINGSKREDITT: AND SB1 NÆRINGSKREDITT: -0.9 0.42 % (5.4%) % (0.23%)

GROWTH IN DEPOSITS COMMON EQUITY OVER THE LAST 12 MONTHS: TIER 1 CAPITAL RATIO: -3.9 14.7 % (9.8%) % (13.3%)

(Previous year's figures in brackets) 6

Willing and able to adapt to a new era

A demanding year is now behind us. Technological changes and greater efficiency Together with the region, we have Things are moving very fast with respect to the use of new technology. Our customers are contacting us via the various emerged on the other side of 2016 digital channels more and more often. We have never had as stronger. Many companies have managed many points of contact with our customers as we did in 2016. to reduce their costs, and so did we. In the year just ended, our customers have, on average, conta- cted us more than three million times a month, mainly via our We have thus maintained the profitability digital channels. This represents an increase of 20% compared necessary. Our result for the year with 2015. In the same period, we saw the number of digital confirms this. housing views increase by more than 30%. This is in spite of the fact that significantly fewer homes were put up for sale.

In my summary of 2015 I reflected on the question of how we We also adopted new technology. We became one of the first can renew ourselves and use our expertise and technology to financial institutions in the country to use robotised processes. develop new and better solutions. The first processes we robotised were internal, manual and repetitive tasks that required many person-years of work. My answer was, put simply, that tomorrow's winners will be Following this, we became the first Norwegian bank to develop the companies that are dynamic and adapt to changing times, self-learning robot technology, which we use in a chat service seize opportunities, and are financially robust. This is precisely linked to our customer service centre. The customer service what we have seen clear signs of in 2016. Rogaland, which was centre dealt with an average of 55,000 enquiries every month hardest hit by low oil prices in 2016, saw a 5.5% increase in the in 2016. number of patent applications in 2016 compared with 2015. An ever increasing proportion of these are made through our This places Rogaland above almost all the counties in Norway, chat channel, which was manually serviced up to the end of beaten only by Oslo. At the same time, we saw a good increase 2016. New robotised technology now enables us to improve in the number of new companies starting up in the region our accessibility to customers at the same time as we can compared with 2015. A total of 14,340 new companies were reduce processing time into central parts of our value chain. established in the four counties that make up our market area, according to figures from Statistics Norway. Local branches are still an important arena for meeting our customers. The number of visitors to our branches fell by more A complex macro picture than 10% in 2016. At the same time, it is clear that the role The year just finished was a demanding one for many branches play in advice processes is important, especially with companies, families and individuals in our region. respect to our younger home mortgage customers. The overall Nevertheless, the picture is a complex one. Relatively large expertise in our branches has been improved in order to meet differences exist between the four counties and between the our customers' future expectations. various industries and sectors. Companies with a large pro- portion of exports had a good year in 2016, helped by a weak Strengthened tier 1 capital Norwegian krone. While, companies that are heavily dependent In the last few years, we have strengthened the bank's on oil and gas have been through demanding processes. At capital ratio brick by brick. In the last year, we strengthened our year-end 2016, there was considerably more optimism around common equity tier 1 capital ratio by 1.4 percentage points to than there was at the start of the year. The main index, which 14.7%. We therefore satisfy the regulatory authorities' require- we measure in our business survey of economic activity, was at ments. The bank's capital ratio was primarily attained through 54% compared with 47% at the start of 2016. balanced, profitable growth, combined with a moderate 7

dividend rate. We are now in a position to play a more adaptation to the changes taking place around us has also aggressive role in the market, at the same time as we can enabled us to provide more relevant services to our customers, normalise the dividend rate going forward. regardless of the customer's choice of channel.

Outlook The prevailing market conditions and continued low oil prices will continue to present challenges for some of our customers. Nevertheless, we are better equipped than ever before, both with respect to capable and motivated employees and with respect to good financial strength. The group's continuous Arne Austreid Chief Executive Officer The BUSINESS BAROMETER survey shows business and industry have low expectations for the year ahead.  The county governor raises objections to the group's construction ARNE AUSTREID presents plans for the Financial Park in Bjergsted SR-Bank's new foundation due to finds of an endangered species with our new purpose, vision of moss, WATER SCREW-MOSS. and customer promises. The elm trees hosting the endangered SpareBank 1 SR-Bank During the month, Austreid species of moss are moved to Rudlå Park celebrates its travels the region to meet all in March. The story gains both local 10TH ANNIVERSARY of the group's employees. and national media coverage. in Bergen.

January M arch May July

2016 F ebruary April June

SpareBank 1 SR-Bank The bank introduces a Kristian Siem announces at launches NEW WEB PAGES NEW CRM SYSTEM, SpareBank 1 SR-Bank's Petro Finance with a new, user-friendly which will ensure faster responses Conference that he wants to design. The pages are to customer enquiries. RESTRUCTURE THE NORWEGIAN THE SR-BANK SHARE responsive and adapt to the OFFSHORE INDUSTRY. Start of year, customer's digital surface. SpareBank 1 SR-Bank establishes Siem launches a new NOK 2 billion 4 January 2016: NOK 38.70 a dedicated mCASH TEAM. fund in cooperation with Elliott, an The goal is to increase the number American hedge fund. of mCASH merchants and users. DAG MEJDELL becomes the new chair of the board of SpareBank 1 SR-Bank. The corporate market division Mejdell is best known establishes a new customer for being the chief team for the smallest corporate executive of Posten customers: CM DIGITAL. Norge AS for the last few decades.

Gross loans Digital bank Customer service centre

More than 3 million visits 55,000 visits NOK 182 billion per month per month SpareBank 1 SR-Bank decides to close 11 branches. This signals a clearer focus on fewer and LARGER BRANCHES WITH STRONG SPECIALIST ENVIRONMENTS that can provide customers with even better advice when needed.

FOUR AMBITIOUS STUDENTS The Business Barometer for September spend the quiet summer 2016 shows that companies in Rogaland, months doing internships Hordaland and Agder see CLEAR SIGNS Groundbreaking ceremony THE SR-BANK in the corporate market OF IMPROVEMENT. After two tough on the site where the SHARE division. The students produce years and demanding restructuring, the FINANCIAL PARK BJERGSTED will be End of year, 30 December 2016: a 70-page report on the positive signals are stronger built. Block Berge Bygg is the turnkey NOK 60.75 competition picture than they have been for a contractor and 85% of the work will be the bank faces. long time. performed by local partners.

July p tembe v embe Se r No r

2017

D r June August October ecembe

The boards of SpareBank 1 SR-Bank ASA SpareBank 1 SR-Bank announces that and a subsidiary, a robot, a DIGITAL CUSTOMER HOST SpareBank 1 SR-Finans AS, WITH ARTIFICIAL INTELLIGENCE, sign a JOINT MERGER PLAN. will answer customer service The merger comes into effect on questions on SR-Bank.no. 1 January 2017. Red-letter day: 1 October 2016 marks the 40TH ANNIVERSARY of 22 savings banks merging to form Sparebanken Rogaland (SR-Bank).

Branch visits Savings and management Digital housing views

90,000 visits More than 2.4 million per month NOK 18 billion 10

SpareBank 1 SR-Bank ASA – Strategic and financial goals

SpareBank 1 SR-Bank aims to be an aggressive financial group capable of defending and increasing its market Financial goals for 2017: shares in Rogaland, Hordaland, and Return on Agder, in both the retail and corporate equity: 11% markets. Common equity by end tier 1 capital ratio: 15% of 2017 The group SpareBank 1 SR-Bank is the leading financial group in Southern and Western Norway. Our market area is Rogaland, Hordaland and the Agder counties. The group is a fully-fledged financial services group offering traditional banking services such as loans, insurance and savings products, as well as securities As a part of the SpareBank 1 Alliance, a bank and product trading, accounting services and estate agency services for alliance between independent, locally based Norwegian banks, both retail and corporate customers. the group also benefits from economies of scale within, for example, IT development. As at 31 December 2016, SpareBank 1 SR-Bank had more Together with the other SpareBank 1 banks, the group has esta- than 300,000 customers and gross lending of more than blished a joint customer service centre that serves customers NOK 182 billion. Mobile bank customers visit it on average five via the phone and chat until 24:00 at night, 365 days a year. times a week and no less than 80% of individual sales of funds are made via digital channels. The group has 36 branches in SpareBank 1 SR-Bank's largest owner is its market area. The self-service channels and the fact that Sparebankstiftelsen SR-Bank. The group was converted from customers can meet us in person at branches or contact us an equity certificate bank to a public limited company ('limited on the phone, via chat and on Facebook mean that the group liability savings bank') with effect from 1 January 2012. The is always available to the customer. Customer relationships Sparebankstiftelsen SR-Bank foundation was established at are built up through both digital and physical meetings that the same time. The purpose of the foundation is to manage become full conver­sations across the channels. the shares it received upon its formation and to exercise and maintain a substantial, long-term and stable ownership interest SpareBank 1 SR-Bank's competitive advantage is that while we in SpareBank 1 SR-Bank ASA. The foundation can distribute are a big commercial bank, we also have historic roots in many the surplus just as savings banks have traditionally done and local savings banks in the region. donates to non-profit projects in the group's market area. 2016 was the 40th anniversary of Sparebanken Rogaland's establishment as SR-Bank, an amalgamation of 22 local savings Capital banks. The combination of knowledge and understanding the SpareBank 1 SR-Bank's goal is to produce financial results that staff possess of the market area and the opportunity provide a good, stable return on equity and a competitive return SpareBank 1 SR-Bank has as a limited liability savings bank to in the form of dividends and a higher SRBANK share price for bring capital to the region is unique. Because we are a regional the owners. The return on equity and cost/income ratio must savings bank, the group has short decision-making chains and be in the upper half of a Nordic benchmark. knows our market area better than most. SpareBank 1 SR-Bank is therefore closer to the people and businesses in our region The current requirements indicate that the group must have than other banks. common equity tier 1 capital of 15% by the end of 2017. 11

Profitable customer growth Improving efficiency The group aims to stimulate growth and development in the A digital customer host will be able to answer customers on region. The group is entering a new era and can now contribute www.sr-bank.no from January 2017. This means the bank will even greater financial power than was possible when we were be able to provide customer services 24 hours a day. This is the building up our common equity tier 1 capital. group's second generation robot. The entry of robots into the SpareBank 1 SR-Bank will focus on customer growth in 2017, but world of finance is the single largest technological change the that growth will not be achieved at the expense of profitability. industry has ever experienced. It will change the way we work in the group. It is a fact that customers are visiting branches less Clear requirements are set for lending in the corporate market. often due to digitalisation. The group therefore closed thirteen The companies that receive financing must have a long-term branches in 2016 and, at the same time, reinforced staffing and perspective and the group must know the owners and expertise in the other branches. Digitalisation and robotisation management of the company well. Financing linked to shipping are two important driving forces behind continuous efficiency and offshore is managed by a central specialist environment. improvements in the group.

SpareBank 1 SR-Bank creates value by assuming recognised and acceptable risks. The group therefore invests significant resources in developing risk management systems, processes and skills in line with leading international practice. 12

Customers SpareBank 1 SR-Bank’s vision is to be the customers’ first choice in Southern and Western Norway. The group needs to build External factors stronger customer relationships and offer comprehensive customer services to achieve this. The group must use custo- that affect the business mer data in a way that makes it easy to be a customer and take • Digitalisation and personalised offer for each relevant initiatives in relation to customers. This involves both customer simplifying the customer’s everyday life and streamlining the • Customers expect seamless services bank’s processes – in both cases with digitalisation as a clear • Untraditional business models and the sharing driving force. Building stronger customer relationships involves economy combining the best from two worlds: artificial intelligence, • Actors in other industries setting the standards through smart technology and robotisation, and emotional and expectations for user experiences online intelligence, through personal contact with professional staff. • Open mobile payment services • Niche actors in the traditional banking market • Development of oil prices and region's business Customers are setting ever higher requirements for user-friendly and industry digital services. The group made changes in all of its business • PSD2 – the EU's revised payments directive divisions at the beginning of 2017 in order to hone its efforts • Capital requirements and regulations from the in digital surfaces. The goal is to increase digital sales going Financial Supervisory Authority of Norway forward.

Culture and expertise SpareBank 1 SR-Bank is continuously changing in order to rationalise, cut costs and adapt our organisational structure to the customers’ behaviour. This will have an impact on employees’ duties and the skills we will recruit in the future. The return on equity and In the next five years the group will recruit more mathe­ cost/income ratio must maticians, engineers and technologists than economists. be in the upper half of a Changes and new duties will require SpareBank 1 SR-Bank’s employees to be very adaptable. Nordic benchmark. Each employee will have to be energetic and committed in order to understand the customers’ needs and their new preferences. The foundation is intended to provide guidelines for everything the employees do in SpareBank 1 SR-Bank.

THE FOUNDATION

PURPOSE Our aim is to stimulate growth CUSTOMER PROMISES and development in the region. VALUES

Always available VISION Prudence and respect The customer's first choice in Understand the customer best Southern and Western Norway Committed and efficient

It pays POSITION

We are here – even in Nearer to people and companies turbulent times 13

SpareBank 1 SR-Bank Financial Group

SpareBank 1 SR-Bank ASA

EiendomsMegler 1 SpareBank 1 SR-Boligkreditt AS SR-Forvaltning AS SR-Eiendom AS Regnskapshuset SR AS 100% 100% 100% 100%

SpareBank 1 SpareBank 1 SpareBank 1 SpareBank 1 BN Bank ASA Gruppen AS Boligkreditt AS Næringskreditt AS Kredittkort AS 23.5% 19.5% 13.9% 21.9% 17.9%

Group structure

General meeting

Nomination committee External audit

Board of directors

Internal audit Remuneration committee Audit committee Risk committee

Chief Executive Officer

Retail market Corporate market Capital market Economics and Finance

Business Support Risk Management Communications Organisation and HR and Development and Compliance 14

People and companies in Southern and Western Norway – SpareBank 1 SR-Bank's market and customer base

SpareBank 1 SR-Bank is an important part Customer of the social infrastructure in Southern base and Western Norway. The region has 25% of been very fortunate as far as the Norway's population 25% "distribution" of resources is concerned. At the same time, it takes incredible people who know how to make the most of the opportunities afforded by these largest oil company, Statoil, and most of the international resources in order for them to be of operator companies have their Norwegian head offices in the Stavanger region. Around 20% of the labour force in Rogaland value. Those people can be found here. works in the oil industry. Government agencies such as Petoro, the Norwegian Petroleum Directorate, and the Norwegian Oil Figures from Statistics Norway show that 1,285,000 people and Gas Association (NOG) have their headquarters in Stavanger, live in the group's market area. Hordaland, Rogaland and the as does the Norwegian Oil Industry Association (OLF). Agder counties have 655,000 people in work. The same area has 125,000 registered businesses, 24,000 27% of the labour force in Rogaland works in the public sector, of which are companies with more than four employees. 12% in the wholesale and retail sector, and 7.5% in building and Rogaland is the group's core area and our ventures in our construction according to Statistics Norway. The county is one neighbouring counties, Agder to the south and Hordaland to of the most important producers of meat, dairy products and the north, have produced good growth in market shares and vegetables in Norway. It is also home to a strong financial profitability in just a few years. industry with SpareBank 1 SR-Bank, Hitec Vision and the SKAGEN Funds as the largest actors. Business and industry in the region Major infrastructure projects are also taking place in the region Business and industry in Southern and Western Norway is that are helping to ensure good conditions for business and versatile and adaptable. The people here have a tradition of population growth. getting to grips with challenges and sorting them out rather than waiting for others solve their problems for them. Business New opportunities and industry here has gained inspiration from outside the Since the downturn in the oil sector started, there has been a region over many decades by attracting international expertise heavy focus on restructuring and new business opportunities and extensively trading with, and exporting to, the rest of the in the region. The number of patent applications from the world. The region is also strategically well-positioned in terms county has risen by almost 40% since 2013, according to the of international communication, the Norwegian Continental Norwegian Industrial Property Office. Shelf and regional transport routes. Ipark Inkubator, Innovation Dock, Creator and SpareBank 1 SR-Bank's own Gründerhus are all meeting and Employment in Rogaland working places for entrepreneurs. These environments have The Stavanger region has played a key role in the evolution of quickly established themselves in the Stavanger region. the oil and energy industry in Norway since oil was first found 388 bankruptcy proceedings opened in Rogaland in 2016, on the Norwegian Continental Shelf in 1969. Not only has this an increase of 19%, while the net number of businesses in made the region prosperous, it has also attracted unique Rogaland rose by 800 in the same period. Nationwide, the expertise and heavy hitters to our market area. Both Norway's number of bankruptcies increased by 2% in the same period. 15

Exports and tourism based in Southern and Western Norway, where their proximity Agder and Hordaland are home to some companies in the oil to Europe may mean significant growth opportunities for sector, but they also have a larger proportion of businesses renewable energy production in the years ahead. and industries that is benefiting from a weak Norwegian krone exchange rate, such as the fishing industry, traditional exports Oil prices affect the region and tourism. Value creation within tourism has increased Oil prices have fluctuated dramatically in the last two years. As a throughout the group's market area in the last few years. consequence of this, petroleum activities fell in 2015 and 2016 In 2005, the tourism industry in the three counties of Vest after having achieved record levels in 2014. The Norwegian Agder, Rogaland and Hordaland was worth NOK 7.6 billion. Petroleum Directorate is expecting a drop of around 10% in By 2013, this value creation had grown to NOK 13 billion, 2017, meaning the level of activity will thus be around 35% according to a report from the Ministry of Trade and Industry. lower than it was 3 years ago. The downturn is expected to A low Norwegian krone exchange rate resulted in more slow in 2017 and the outlook thereafter is reasonably stable. Norwegians and foreigners choosing to take their holidays The operating costs associated with oil operations, which are in Norway in 2016. important for economic activity in the region, are more stable than the investments. Two important projects that will be Hordaland is the county in Norway with the most employees in crucial for the level of oil activity in the region going forward aquaculture, which is Norway's second largest export industry. involve extraction in the Johan Sverdrup and Edvard Grieg oil Statistics from the Norwegian Directorate of Fisheries show that fields. Lundin Norway has adjusted its total estimated reserves Hordaland and Rogaland sold more than NOK 8.2 billion worth upwards by 5 million barrels to 743.5 million barrels for the two of fish in 2015. Our region also has lots of energy resources. oil fields. A number of central actors in Norwegian energy production are 16

Positive change of mood From labour being in great demand and the labour market being tight, the region has experienced a significant change in mood. Housing prices in the Stavanger region have fallen, while other large urban regions of Norway have experienced price rises. However, the group’s half-yearly business survey, the Business The region Barometer, shows that companies are more optimistic now than they were before. More companies expect an upturn has shown that rather than a downturn in 2017 – the oil industry also shows a clear improvement in relation to earlier surveys. A majority of it is home to companies expect higher orders on hand, especially in industry incredible, strong- and the wholesale and retail sector. The companies also expect profitability to improve. This shows that the companies’ profita- willed people bility improvement measures are expected to produce results. with the ability Expectations concerning future market performance improved to do what might in the last few quarters, but some uncertainty still exists about the group’s market area. Despite the recession, the region at first appear has seen moderate unemployment compared with what is common in other countries and it is expected to remain impossible. moderate going forward. Arne Austreid, Chief executive officer Customer base SpareBank 1 SR-Bank’s market area stretches from Grimstad in Aust-Agder to Åsane in Hordaland, although its gravitational centre and largest market share is in Rogaland. Around 25% of the population of Norway lives in this geographical region. The county has a young population and a relatively high number of births. Around 30% of the population in our market area have taken higher education, 44% are educated to upper secondary school people in 2013 and had fallen to 700 in 2015. The relocations level, and 26% are educated to lower secondary school level. are probably being affected by the regional economic conditi- ons and the downturn in the oil industry. In the last few decades, Rogaland has seen population growth of 16% and was among the counties with the highest growth Norwegians’ good access to the internet and interest in using rates in the period. Statistics Norway is forecasting population it has changed most people’s behavioural patterns. 90% of the growth in the lead up to 2040 of 26% in Vest-Agder and population aged 16-79 does their banking digitally. Ten years Rogaland, 25% in Aust-Agder, and 23% in Hordaland. Statistics ago this proportion was 64%. Almost 90% of the population also Norway has adjusted its growth forecast for Rogaland and uses the internet to search for information about goods and Hordaland downwards slightly from a very high level in the services, shows the Norwegian Media Barometer survey. previous forecast. This is due to the fact that many people 85% of the adult population in Norway has a smartphone and moved away from Rogaland to other places in the country 75% have access to a tablet. between 2013 and 2015. The net influx to Rogaland was 4,300 17 18

The SR-Bank share

Relative share price trend  Index  = . January 170

150

130

110

90

70

50 January February March April May June July August September October November December

SRBANK OSEBX

Facts about our share formation and to exercise and maintain a substantial, long-term The share capital amounts to NOK 6,393,777,050 divided and stable ownership interest in SpareBank 1 SR-Bank ASA. into 255,751,082 shares, each with a nominal value of Ownership should be exercised in accordance with the NOK 25. generally accepted principles of corporate governance and within the limits and guidelines adopted by the general meeting. The ticker code on the Oslo Stock Exchange is "SRBANK". The ownership interest must represent at least 25% of shares "SRBANK" is included in the OSEAX All-share index and issued. OSE40 Financials/OSE4010 Banks sector index. The liquidity segment is Match. The foundation can distribute its surplus and, in line with savings bank traditions, donates to publicly beneficial projects Facts ABOUT Sparebankstiftelsen SR-Bank in Rogaland, Aust-Agder, Vest-Agder, and Hordaland. The Sparebankstiftelsen SR-Bank foundation was established as part of the conversion. The purpose of As at 31 December 2016, the foundation owned the foundation is to manage the shares received upon its 72,419,305 shares, equivalent to 28.3% of shares issued.

Market value: NOK 15,5 billion

Largest owner: Dividend 2016: per Sparebankstiftelsen SR-Bank NOK 2.25 share 19

Development of trade volume  NOK million NOK million The parent company's distributable profit in 2016 was 1,2 4,0 NOK 2,032 million, equivalent to NOK 7.95 per share. In line 1,0 3,5 with SpareBank 1 SR-Bank’s dividend policy, various factors 3,0 have been taken into consideration in determining the dividend, 0,8 2,5 including, in particular, our financial strength and the tier 1 capital ratio in light of the new regulatory requirements for 0,6 2,0 banks. The current requirements indicate that the group must 1,5 0,4 have common equity tier 1 capital of 15% by the end of 2017. 1,0 0,2 0,5 The board proposes a dividend of NOK 2.25 per share for 2016. 0 0,0 This represents a dividend rate of around 33% of the group's earnings per share. y ly pril ne rch s nry cober ebrry ecember ovember Volum epember Investor policy Volume (20 days moving average) It is crucial for SpareBank 1 SR-Bank to maintain the confidence of the investor market by disclosing accurate, relevant and hre price nd priceboo timely information about the group's performance and results. Market information is generally provided via quarterly investor p presentations, websites, press releases and financial statements. p Regular presentations are also made to international partners, p rating agencies, lenders and investors. p It is in SpareBank 1 SR-Bank’s own interests to publish current p financial analyses of the highest possible quality. All analysts are p treated equally at all times regardless of their recommendations p and view of the bank's share. At the end of 2016, 12 brokerage

p houses officially covered SRBANK. Updated contact information for these is available at all times on: www.sr-bank.no/ir. p y ly pril ne

rch Information addresses s nry cober ebrry ecember

ovember SpareBank 1 SR-Bank publishes information for the market hre price epember online at: www.sr-bank.no.

Other links to financial information: www.ose.no (Oslo Stock Dividend policy Exchange) SpareBank 1 SR-Bank's financial goal is to achieve results that provide a good, stable return on the bank's equity in order Financial calendar for 2017 to create value for the owners. In other words, a competitive General meeting 20.04.2017 return in the form of dividends and a higher share price. Ex dividend date: 21.04.2017 First quarter: 27.04.2017 Particular account is taken of the group's capital ratio, including Second quarter: 09.08.2017 capital adequacy requirements and the group's targets and Third quarter: 27.10.2017 strategic plans, when setting the annual dividend. The level of the annual cash dividend in the lead up to 2018 will take into Preliminary accounting figures for 2017 will be published in account the fact that the banking sector is currently building February 2018. up capital to satisfy new capital requirements. Unless capital requirements dictate otherwise, the board's goal will be to ensure that the payout ratio gradually increases in the lead up to 2018. The group's dividend policy calls for around half of the profit after tax to be distributed as a cash dividend. 20

Ownership The table below shows the 20 largest shareholders as at SpareBank 1 SR-Bank aims to ensure the good liquidity 31 December 2016: of its share and that it has a good range of owners who represent Norwegian and international investors. 20 largest owners as at 31 December 2016 No. of shares Stake % 1 Sparebankstiftelsen SR-Bank 72,419,305 28.3% The share price rose from NOK 39.30 to NOK 60.75 in 2 Gjensidige Forsikring ASA 12,308,416 4.8% 2016. Taking into account the paid dividend of NOK 1.50, 3 State Street Bank and Trust Co, USA 7,561,759 3.0% this represents an effective return of 58.4%. The Oslo Stock 4 Vpf Nordea Norge Verdi 7,454,497 2.9% Exchange Benchmark Index rose by 12.1% in the same 5 SpareBank 1-stiftinga Kvinnherad 6,226,583 2.4% period. 6 Wimoh Invest AS 5,761,169 2.3% 7 Odin Norge 4,384,644 1.7% There were 10,428 (10,153) owners of SRBANK at year-end 8 Danske Invest Norske Instit. II 3,646,410 1.4% 2016. The percentage owned by companies and individu- 9 Pareto Aksje Norge 3,065,035 1.2% als based abroad was 19.1%, and the percentage owned by 10 Verdipapirfondet DNB Norge (IV) 2,963,871 1.2% companies and individuals resident in Rogaland, the Agder 11 State Street Bank and Trust Co, USA 2,851,948 1.1% counties and Hordaland was 49.9%. The 20 largest share­ 12 Clipper AS 2,565,000 1.0% holders owned a total of 56.9% of the shares. The bank 13 State Street Bank and Trust Co, USA 2,247,876 0.9% owned 108,983 treasury shares. Group employees owned 14 Verdipapirfondet Alfred Berg Gamba 1,833,914 0.7% a total of 1.8% of the shares at the end of the year. 15 KAS Bank NV, The Netherlands 1,804,586 0.7% 16 Danske Invest Norske Aksjer Inst. 1,770,594 0.7% 17 National Insurance Scheme Fund 1,688,000 0.7% 18 J.P. Morgan Chase Bank, USA 1,671,233 0.7% Credit rating 19 Vpf Nordea Avkastning 1,664,410 0.7% On 10 April 2016, Moody’s Investor Services confirmed 20 Westco 1,649,689 0.6% its credit rating of A1 for SpareBank 1 SR-Bank, with a Total 20 largest 145,538,939 56.9% negative outlook. The short-term funding rating remained unchanged throughout 2016 at Prime 1. Foreign owners 19,1 % On 28 December 2016, Fitch Ratings confirmed its A- (long-term) and F2 (short-term) with stable outlook Total Regional credit ratings of SpareBank 1 SR-Bank. owners share Other 10 428 49,9 % Norwegian owners 31,0 %

Key figures* 2016 2015 2014 2013 2012 Market price 31.12, NOK 60,75 39,30 52,50 60,25 37,20 Dividend per share, NOK 2,25 1,50 2,00 1,60 1,50 Direct return 1) 3,7 % 3,8 % 3,8 % 2,7 % 4,0 % Yield 2) 58,4 % -21,3 % -10,2 % 66,0 % -4,9 % Book equity per share, NOK 3) 71,54 66,14 60,28 55,00 49,48 Earnings per share, NOK 6,87 6,83 8,20 7,28 5,33 Payout ratio, net 4) 33 % 22 % 24 % 22 % 28 % No. of shares issued 31.12 255 751 082 255 751 082 255 751 082 255 751 082 255 751 082 Treasury shares 31.12 108 983 25 398 231 043 207 645 345 134 No. of outstanding shares 31.12 255 642 099 255 725 684 255 520 039 255 543 437 255 405 948 *) From and including 1 January 2012, the old equity certificates were converted to shares

1) Dividend as a percentage of market price at year-end 2) Appreciation during the year plus dividend paid as a percentage of market price at the beginning of the year 3) Equity divided by number of shares issued 4) Dividend as a percentage of the group’s net profit for the period 21 Corporate social responsibility (CSR)

SpareBank 1 SR-Bank is a responsible social actor Responsibility is profitable Social responsibility is not something we are assigned, it is some­ SpareBank 1 SR-Bank wants to stimulate growth and development thing we take. We have done so as part of our day-to-day operati- in the communities of which we are a part. Decisions will be based ons ever since the establishment of Egersund Sparebank in 1839. on a long-term perspective, which means that the group will avoid This has formed part of our basic philosophy ever since. Based on short-term gains if they are likely to significantly diminish or harm our in-depth local knowledge and proximity to our customers, we society. make judgements about the economy and risk on a daily basis in combination with the fulfilment of our social mission. A mission Our work on social issues forms an integral part of our continuous that is about stimulating growth and development in the region planning. This is how we ensure that ethics, the environment and in which the group operates. We aim to do this by, among other important social questions remain on the agenda at all times. things, ensuring the region has capital for business development Ensuring that daily operations focus strongly on financial value and building homes, contributing expertise, and helping to create creation within all business areas is a very important part of our good conditions for continued growth. Even though we, as the corporate social responsibility. region's largest and leading financial group, primarily focus on our immediate surroundings, we are also ensuring that everything we Investment criteria do is sustainable in a global perspective as well. We believe that SpareBank 1 SR-Bank's investment activities, both on its own active social involvement directly creates value by reducing risk, account and on behalf of customers, follow rules that are intended opening up new business opportunities, producing motivated staff, to ensure that the group avoids participating in violations of human and helping to maintain a good reputation. and labour rights, corruption, serious environmental harm or other actions that could be considered unethical. SpareBank 1 SR-Bank Shareholder structure will not invest in companies which, themselves or through units SpareBank 1 SR-Bank's largest shareholder is they control, produce tobacco or pornography. The same applies Sparebankstiftelsen SR-Bank, which owns a stake of 28.3%. for other investments in companies that are involved in anti- According to the decision taken by the Ministry of Finance (case personnel mines and cluster weapons, or in companies that 11/1402 of 21 June 2011) concerning converting to a public limi- develop and produce key components of weapons of mass ted company, one of the conditions for allowing the conversion destruction. Weapons of mass destruction are defined as ABC was that Sparebankstiftelsen SR-Bank must own a stake of equal weapons (atomic or nuclear weapons, biological weapons and to or higher than 25% in SpareBank 1 SR-Bank. In addition to this, chemical weapons). the foundation's purpose must be to exercise long-term and stable ownership of SpareBank 1 SR-Bank, and through this ensure that The group both makes direct investments and acts as a distributor SpareBank 1 SR-Bank continues its saving bank operations with of investment products on behalf of Odin Forvaltning AS and local roots in Rogaland, Hordaland and Agder. This ensures both SpareBank 1 Forsikring AS. Both have clear investment strategies business and private households have ready access to a large, that integrate both corporate governance and social responsibility regionally anchored financial group with highly qualified person- in their assessments and decisions. nel, a broad range of services, and good, stable access to capital.

We have defined the following four categories, and associated focus areas, which are based on the group's integration of corporate social responsibility:

Financial Society Environment HR

Good corporate governance Employment Health, safety and the Ethics committee Risk management Anti-corruption environment Code of conduct Credit management Code of conduct Videoconferencing Personnel handbook that Profitability Fraud prevention measures Supplier criteria includes a strong focus on Financial strength Our aim is to stimulate growth Hybrid and electric vehicles attitudes and values Purchases and development in the region Climate accounts Training Financial grants and sponsorship Inclusive workplace enterprise Transfer of competence Information security Innovation 22

Direct investments are made by both the bank and the bank's Corporate governance wholly owned subsidiary, SR-Forvaltning AS. The company Corporate governance in SpareBank 1 SR-Bank ASA comprises manages investments on behalf of both the bank and the the objectives and overriding principles according to which group's customers. The company practises a clear policy of the group is governed and controlled, in order to secure the only investing in companies that exercise their responsibility interests of shareholders, customers and other stakeholders. to ensure that human rights are addressed, corruption is The main principles for corporate governance are: openness, combated and commercial activities are sustainable. predictability and transparency.

SR-Forvaltning thoroughly reviews of all of its investments and The group complies with the Norwegian Code of Practice for potential investments in order to comply with these guidelines. Corporate Governance and complies with Norwegian law as a If any of the companies SR-Forvaltning has invested in breach matter of course. the company's guidelines or do not have measures in place, this will have consequences for the company's position or potential SpareBank 1 SR-Bank has clear guidelines intended to prevent investment decisions. violations of human and labour rights, employees taking part in corruption or contributing to environmental harm, and/or other All companies in which we are considering investing are actions that could be deemed unethical. checked against the Exclusion List at Norges Bank Investment Management (NBIM). Digital searches are also conducted for The UN Global Compact's ten principles for sustainability all relevant companies in order to identify potential breaches provide important guidelines. or controversial involvements before a decision concerning an investment is made. Ethics and anti-corruption The group's code of conduct is meant to help improve aware- Requirements for our suppliers ness of and compliance with the high ethical standards required SpareBank 1 SR-Bank makes a significant amount of purchases of all employees. The code of conduct is intended to contribute each year. to, among other things, fighting corruption, extortion, bribery, The bank focuses on its social responsibilities in connection money laundering, fraud, terrorism funding and criminal activity with these purchases, particularly in relation to: funding. The group has an ethics committee that continuously • Human rights assesses the existing ethical framework in light of the expectati- • Working conditions ons of our stakeholders and society with respect to ethics. • The environment • Fair operating practices The personnel handbook describes how employees can report if they learn about situations that contravene the Our own activities are subject to a series of national and inter­ applicable regulations, material breaches of internal rules, national rules and requirements. Suppliers that are going to or other materially unacceptable situations. Whistle-blowers perform services on our behalf have a duty to adapt such that are able to report anonymously, in writing or verbally. we do not commit breaches. Suppliers must also help to ensure that purchase agreements comply with applicable industry Employees of SpareBank 1 SR-Bank shall under no circumstan- standards and SpareBank 1 SR-Bank's own internal guidelines. ces use their position to achieve personal benefit or act in a Suppliers and their subcontractors must stay up-to-date on, manner that could harm the group's reputation or be in breach and comply with, current requirements in legislation, regulati- of Norwegian law. ons or other government instructions that apply to the suppli- ers' activities and respective areas of responsibility. Suppliers are SpareBank 1 SR-Bank emphasises the prevention of cor- responsible for ensuring that they hold the licences and permits ruption and wants to develop a culture of anti-corruption in required to perform their activities. the companies that make up the group. The group's code of Suppliers must actively ensure that earlier links in the value conduct, which is readily accessible in digital format, contains chain comply with the requirements evident from agreements, specific rules on this. They cover 'personal benefit and corrup- as well as other contractual requirements. In those circum- tion' and are intended to raise awareness and improve people's stances where a supplier operates within areas or industries knowledge about corruption-related issues. They are also where there is an elevated risk of breaching social responsibility meant to clarify the group's attitude and routines to ensure that requirements, the supplier's duty of care increases. all employees comply with anti-corruption legislation. Every year, employees must sign to confirm that they have read and understood the contents of the group's code of conduct. 23

Support for non-profit causes Climate and environmental measures The savings bank tradition has been continued through As a responsible financial group, we are taking a proactive Sparebankstiftelsen SR-Bank, which represents a key part approach to climate challenges, including by setting criteria for of our social responsibility strategy. The foundation's grants environmental prevention measures in our own organisation. to non-profit causes in the region, which are based on The group has a specific environmental strategy and guidelines, SpareBank 1 SR-Bank's capacity to distribute dividends, are well which are reviewed annually. integrated into the work performed by the group's customer committees. The interaction between the customer commit- The group regularly introduces measures that are intended to tees, organised as local advisory bodies for both the group and help reduce the consumption of electricity, paper and other Sparebankstiftelsen SR-Bank, is intended to strengthen our local resources, as well as ensure that resource-demanding travel presence and involvement. is limited. A great deal of attention is also paid to managing technological waste and purchasing environmentally friendly solutions. Overall, the group is doing good work to ensure it Status 2016 buys the right technological equipment based on specific assessment criteria for energy and environmental requirements. Employees and the organisation SpareBank 1 SR-Bank aims to be an attractive and inclusive All technological equipment is treated as special waste, place to work for employees in all age groups and phases of which ensures the equipment is properly dealt with from their life. The SpareBank 1 SR-Bank Group tries to ensure that all an environmental perspective. The group returned 2.2 tons employees are satisfied with the balance between work, home of technological waste in 2016, which is on a par with the level and leisure. At the same time, a number of different measures in 2015. have been implemented to motivate employees to stay healthy, both by developing a good working environment and by A significant drop in paper consumption of 17.7 tons was encouraging them to exercise. We believe that employees registered in 2016 compared with 2015. whose needs are catered for will perform better, which This is a result of deliberate, targeted measures. This is, first and benefits both them and the group. foremost, due to much of our customer communications being switched to our digital channels, combined with new digital The group has established a well thought through framework solutions for document management internally. for the organization, including: a personnel handbook, HSE The employees in the SpareBank 1 SR-Bank Group took 4,537 handbook, inclusive workplace agreement, and several internal flights during 2016, a decrease of 13% compared with 2015. committees regulated by agreements. The executive manage- ment team and the group's two unions work well together in The use of videoconferences, phone conferences and digital these areas. Three contact meetings were held between the tools for interacting and information sharing is one important group executive management team and trade unions in 2016. means of keeping the group's travel activity at a moderately low The following key topics were discussed: level. The group has 25 videoconferencing rooms. Skype was adopted as a tool for meetings in 2016. Skype has been 1. Digitalisation and changes in customer behaviour, as well as installed for all employees and is being used a lot. the consequences these will have for our existing channel structure, including the branches. The group introduced climate accounts in 2016. This was 2. Reorganisation aimed at meeting the future in a competent, initially done to survey our carbon footprint, which in turn is good way for the benefit of the customer and the group's linked to air travel and the use of the company's vehicle fleet. profitability. This includes all vehicles belonging to the group that are 3. The group's skills requirements going forward – composition included in the company's vehicle scheme. of skills. Total CO2 emissions in 2016 amounted to 431.2 tons. The In 2016, the group again refunded a significant amount to calculated emissions include a total of 2,116,747 kilometres cover part of employees' regular exercise expenses in order to travelled by air and a total 617,291 kilometres travelled using promote better health, greater motivation and satisfaction. the group's vehicles. 24

SpareBank 1 SR-Bank takes biodiversity seriously. Funding In connection with planning the group's new head office, it was The group has an overarching credit strategy that clearly states discovered that the building could constitute a risk to a number that the primary market area for credit exposure is Rogaland, of elm trees close to the site. Rare moss species were also Hordaland and Agder. The credit strategy also makes it clear found on some of these trees, including a red listed species, that corporate customers must have a long-term perspective Water Screw-moss. Two of the trees that were hosts for the and that their companies must be run in line with applicable moss species were moved to a suitable site nearby and one tree laws and regulations. was protected where it stood. The trees and their roots weighed 70 tons each. The moving process was demanding, but The group was exposed to neither coal mining nor coal power successful. Expertise was also brought in from the UK that plants in 2016. allowed us to transplant bark with the moss to more elm trees in neighbouring areas. Ethics and anti-corruption The group's ethics committee held three meetings in 2016. The purpose of the committee is to evaluate and improve the group's code of conduct.

In 2016, SpareBank 1 SR-Bank continued to highlight the importance of continuous training and raising awareness about the most important ethical risk areas. This was done both via a dedicated ethics programme and by sending the employees various questions concerning ethics topics. These were read and then answered electronically.

Managers also underwent anti-corruption training in 2016.

In addition to this, a new whistle-blowing system in relation to external actors was introduced for reporting any whistle-blowing related incidents. The new system is intended to protect full anonymity.

Key measures planned for 2017 1. Draw up a plan for further reducing the group's level of CO2 emissions. 2. Conduct a materiality assessment among the group's stakeholders. By asking our stakeholders what they think is important from a sustainability perspective and comparing that with what is important for SpareBank 1 SR-Bank, we will prepare an analysis that provides an overview of what it will be most important to prioritise going forward. 3. Continue to reduce total paper consumption. 4. Continue to reduce total energy consumption in the group's various offices. 5. Continue to reduce the number of flights and increase the use of videoconferencing and other types of video meetings. 6. Improve the group's website with respect to reporting and highlighting the measures and activities we carry out in relation to sustainability.

Both photos: Stavanger natur- og idrettsservice KF 25

Social accounts 2016

Strategic 2015 2016 Group strategy Updated Updated CSR strategy Updated Updated

Value creation Taxes and duties (NOK millions)* 1,086 1,110 Net salaries/pensions and other benefits (NOK millions) 945 1,166 Cash dividend shareholders (NOK millions) 384 575 Growth capital, retained earnings (NOK millions) 1,353 1,457 Purchased goods and services (NOK millions) 918 866

Social factors No. of full-time equivalents, incl. temps 1,190 1,172 Healthy rate 96.86% 96.37% Percentage of women in executive positions 43% 42% Average age 44.3 44.7 Organisational satisfaction 865 900 Inclusive workplace agreement Continued Continued Life phase strategy Continued Continued Management development programme Continued Continued Code of conduct Continued Continued No. of meetings of ethics committee 3 3 Measures/sponsorship from SpareBank 1 SR-Bank (NOK millions) 25 20 No. of grants made by SpareBankstiftelsen SR-Bank 330 358 Total grants made by SpareBankstiftelsen SR-Bank (NOK millions) 30.5 29.1

Environment Technological waste (tons) 2.2 2.2 Reduction in paper consumption (tons) 0% 18% Energy consumption (kWh) 6,070,697 5,646,327 Air travel 5,240 4,537 No. of air travel kilometres 2,315,170 2,116,747 KgCO2 air travel emissions 373,408 341,356 No. of vehicle kilometres N/A 617,291 KgCO2 total vehicle fleet emissions N/A 89,842 No. of electric vehicles in fleet 2 2 No. of videoconferencing rooms 25 25

* Inclusive of company tax, tax paid by employees, and employers' National Insurance contributions 26

Our employees – Our most important capital in the fight for customers

No. of full-time equivalents Average age Healthy rate 1,172 44.7 96.4%

Employees and managers have to be the corporate market, retail market and business support and performing at their best in order to create development divisions that are intended to hone the focus on digital surfaces. added value for customers, directly, and owners, indirectly. The ever faster pace of Skills recruitment technological development and changes At year-end 2016, we have 1,172 full-time equivalents, which represents a reduction of 18 full-time equivalents in in customer behaviour constantly require relation to the year before. At the same time, the group's new skills and mean existing employees SpareBank 1 SR Regnskapshuset venture resulted in an have to develop in order to achieve the increase of 34 full-time equivalents in 2016. group's goals. The market for recruitment is good and SpareBank 1 SR-Bank is viewed as an attractive place to work and many people apply Compared with other financial actors, SpareBank 1 SR-Bank's for jobs here. SpareBank 1 SR-Bank advertised a total of position is "nearer to people and companies". This means our 85 positions, 29 of which were advertised publicly. There were a employees have to be able to see things from the customer's total of 719 applicants: 161 internal and 558 external applicants. perspective. It means that employees have to be genuinely interested in the customer, the competition situation in the Our advert for the group's summer internships encouraged market, and which consumer trends are influencing the custo- IT students to apply and five students with the relevant mer's relationship with the group. In the last year, the group education have received places. executive management team has made a number of changes in concert with the employees in order to adapt our business The first robots have already been implemented in operations to current and future customer behaviour. the group and will affect the duties the employees in SpareBank 1 SR-Bank will perform in the future. The working Changes to the organisation in 2016 day will change considerably and that is having an impact on In the spring, the group implemented a new CRM system that the skills being recruited. changes the way employees work with customer relationship The most important future skills areas, in addition to a high level management. For customers, the CRM system will mean of customer expertise, are computer programming, analysis and faster answers to their enquiries. For advisers, there has been innovation in combination with EQ (emotional intelligence) and a transition from having their own customer portfolio to having creativity. a common customer portfolio. The transition from "mine to our customers" and the implementation of the new CRM system Change and skills mean advisers and managers have gained a far better overview Employees have to be cultivated and developed if they are to of the stream of customer enquiries and can route enquiries perform at their best. Good nourishment is required in the form from offices with little capacity to offices with more capacity. of training and skills enhancement organised by the group. At the same time, the group's employees must also be committed In 2016, the group closed thirteen smaller branches allowing it and take responsibility for their own skills in order to keep to strengthen specialist environments in other larger branches. up-to-date with developments. Annual employee performance Changes have been made to the organisational structure of reviews set out clear expectations vis-à-vis delivery and results. 27

More than 90% of the employees respond that they have a high degree of job satisfaction and commitment.

The group offers good career development opportunities reviewed in all departments with the goal of reinforcing the along customer, discipline and management paths. On average, positive development of the working environment. each employee in the group spends half a business day a week improving their skills. HSE The group systematically works on health, safety and the The rapid development and change in customer behaviour environment, primarily through a HSE committee, which requires an organisation that is both willing and able to change. focuses on operations. The group is an IW company. In 2016, SpareBank 1 SR-Bank is such an organisation. We systemically the IW committee played a major role in developing preventive work to enhance our skills, including through various certifi­ measures as a means of increasing wellness in the group. cation processes. A total of 67 different certifications were It is also encouraging partial sick leave and focusing on degree completed in 2016 in the authorisation scheme for financial of remaining capacity for work during periods of ill health. advisers, authorisation scheme for P&C insurance and LEAN The healthy rate is stable and high at 96.4%. Where people are SixSigma. Skills that are not relevant are being phased out. on long-term sick leave, we actively work on follow-up and Our line management has been further strengthened through facilitation. training and various courses. The group's life phase policy enables employees to deliver as Working environment desired and planned in various phases of life. It also encourages The average score in the group's organisational survey is high. the group's seniors who want to follow the group's develop- It is also worth noting that the response rate was good at 80%. ment to stay in work longer. The target retirement age has The survey shows a rise in parameters such as motivation, been increased from 63 to 64.5 going forward. The average learning and development, as well as a high score when it retirement age in 2016 was 63.9, a decrease of 0.2 years comes to trust in the group executive management team. compared with 2015. More than 90% of the employees respond that they have a high degree of job satisfaction and commitment. The survey was 28

Gender equality SpareBank 1 SR-Bank wants to ensure that men and women have the same opportunities in relation to professional development, pay and careers. In 2016, the ratio between men and women was 55% women and 45% men. The average age has risen by 0.4 years since 2015 to 44.7 and the average length of service is 13.3 years. The group executive management team comprises eight men and one woman. 42% of the group's managers are women.

Cooperation with employee organisations and the safety service The group cooperates constructively with both employee organisations and the safety service. They both provide appropriate help based on their missions in order to ensure that the group can achieve its goals.

Employee compensation Our strategy is to practise a competitive compensation model that allows us to attract the skills of the future and retain our capable employees. The group's compensation model consists of three elements: fixed salary, variable pay and other employee benefits. Our variable compensation scheme is intended to encourage extraordinary performance and results, and has been designed in line with the group's strategies, business goals and values. Variable pay is awarded based on an assessment of both financial and non-financial targets and compliance with applicable laws and regulations. Any variable compensation scheme may, based on a discretionary assessment, be curtailed or eliminated entirely if the group's financial situation or other factors indicate that it would not be responsible to pay variable compensation.

The rapid development and change in customer behaviour requires an organisation that is both willing and able to change. SpareBank 1 SR-Bank is such an organisation. 29 30

Business areas

RETAIL MARKET relevance in both digital and serviced channels. SpareBank 1 SR-Bank is the leader in the retail market in The retail market division gained car and consumer financing Southern and Western Norway with 312,000 retail customers products at the start of 2017. older than 13. This represented a market share of 20% in our market area at year-end 2016. In addition to retail customers, Going forward, the retail market will continue to focus on digital the division also serves 5,900 small business and agricultural services and products in combination with personal advice customers. A complete range of good digital services, provided through strong, modern local branches. Digitalising a modern customer service centre, and a well-developed work processes and good analysis will contribute to efficient network of branches provide our customers with fast, easy operations, greater relevance and fast decisions. access to financial services and expertise via all channels. RM 31.12.2016 Growth in commissions Gross loans NOK 93,159 million The retail market division's contribution before losses and im- Total deposits NOK 47,754 million pairments amounted to NOK 1,219 million in 2016. The result Pre-tax profit NOK 1,219 million is NOK 13 million higher than in 2015. This improvement is due No. of full-time equivalents 435 to growth in commissions and reduced costs. Commissions rose by 6% in 2016 with the greatest increase in money-transfer services. The division's costs were reduced by 3% in 2016. The CORPORATE MARKET number of employees in the division has been reduced through The corporate market division has 14,500 corporate customers continuous restructuring. Thirteen smaller offices were merged in five regional business units and two specialist units: one for with their neighbouring offices into larger units during the year. the energy and maritime sector and one for the public sector. SpareBank 1 SR-Bank is a total provider of financial products Weak housing market and services for corporate customers, which are currently being Higher unemployment and a weaker housing market in supplemented with the building up of a specialist unit within Rogaland and Agder resulted in less demand for mortgages. international cash management (ICM). Lending grew by 0% in 2016, while deposits grew by 2%. There was strong pressure on the net interest margin throughout The division has highly professional and knowledgeable the year due to strong competition and a higher risk premium employees with experience in managing business opportunities in the money market. Impairment losses on loans increased and identifying risk. This is vital when it comes to ensuring that slightly in 2016, but were still low. Greater business optimism corporate customers will choose SpareBank 1 SR-Bank as their and stable unemployment are resulting in a better outlook for partner. the housing market. The demand for mortgages is expected to rise slightly during the year. Close to the customers Profit before losses was NOK 319 million higher in 2016 than in The number of digital visits rose by 20% 2015. The growth in digital channels continues. Our digital channels This is primarily attributable to the repricing of the loans saw an average of 3 million monthly visits in 2016, compared and deposits portfolios. There was a heavy focus on risk with 2.5 million in 2015. The increase in traffic in digital management in 2016 since many corporate customers have channels and the launch of new products also resulted in been and are experiencing demanding times. It has been 25% growth in the number of digital sales. Digital channels especially important for SpareBank 1 SR-Bank to be close to now account for more than half of sales of savings accounts, our customers in order to learn the challenges the enterprises funds and savings agreements. The planned development face at an early stage. This will enable the bank to make good, of the services offered is expected to strengthen digital sales robust solutions available for both customers and the bank. further in 2017. Digital focus A strong total provider SpareBank 1 SR-Bank launched new web pages for our In 2016, the retail market division introduced a new CRM corporate customers in 2016. We are constantly striving to system and a new way of working due to changes in customer put more digital sales and self-service solutions in place for behaviour and the demand for faster answers. The analysis corporate customers. In 2016, the division also established the environments have been strengthened and robots have taken CM Digital team, which will serve the 6,500 smallest corporate over a number of duties in production in order to increase our customers. The team will mainly use channels such as the 31 SpareBank 1 SR-Bank ASA

Capital market Retail market Corporate market Administration and support

Wholly owned subsidiaries

EiendomsMegler 1 SpareBank 1 SR-Forvaltning AS SpareBank 1 SR-Boligkreditt AS SR-Eiendom AS Regnskapshuset SR • Mortgage company - • Fund management SR-Finans* • Sales of homes and • Accounting issuer of covered bonds • Active management • Leasing commercial properties • Advisory (home mortgages)

Part-owned companies

SpareBank 1 SpareBank 1 SpareBank 1 BN Bank ASA (23.5%) SpareBank 1 Gruppen AS (19.5%) Boligkreditt AS (13.9%) Næringskreditt AS (21.9%) • Commercial bank Kredittkort AS (17.9%) • Holding company for • Mortgage company - • Mortgage company - with offices in Oslo and • Credit card company, the products companies in the issuer of covered bonds issuer of covered bonds (com- Trondheim based in Trondheim SpareBank 1 Alliance (home mortgages) mercial property mortgages)

* Merged with the parent bank 1 January 2017

phone, email and chat to follow up its customers. CAPITAL MARKET 31.12.2016 CM Digital will respond to incoming enquiries from customers, Gross income NOK 175 million but will also be responsible for the customers in their portfolio Customer income NOK 140 million and proactively following them up. Digital sales will become Own account NOK 35 million increasingly important for the division going forward. Pre-tax profit NOK 94 million A position has therefore been established in the group No. of full-time equivalents 28 executive management team with dedicated responsibility for digital sales and development. SUBSIDIARIES: From 1 January 2017, SpareBank 1 SR-Finans was merged into EiendomsMegler 1 SR-Eiendom AS SpareBank 1 SR-Bank. The number of corporate customers EiendomsMegler 1 SR-Eiendom AS is the leading real estate with leasing in SpareBank 1 SR-Bank is expected in increase in agent in the group's market area and the largest company in the coming years since leasing specialists and corporate advisers nationwide EiendomsMegler 1 chain. Its business operations will be able to work more closely in the same company. consist of brokering commercial property and selling holiday homes, new builds and used homes. CM 31.12.2016 Gross loans NOK 54,922 million 2016 was characterised by a demanding housing Total deposits NOK 37,355 million market in Rogaland, especially in the first quarter, for Pre-tax profit NOK 751 million EiendomsMegler 1 SR-Eiendom. The number of units sold in No. of full-time equivalents 150 Rogaland was around 10% lower than in the year before, while sales in the Agder counties and Hordaland were relatively stable CAPITAL MARKET compared with 2015. The company's costs have been reduced SpareBank 1 SR-Bank Markets is the region's leading securities in order to meet the fall in the number of sales, including by firm. Its activities include own account and customer trading downsizing by nine full-time equivalents in 2016. At the same in interest rate instruments, foreign exchange and equities, time, the company has hired new estate agents to maintain providing advice and facilitating debt and equity funding, as and strengthen its customer capacity. A total of twenty new well as administrative securities services. Its primary mission employees were hired in 2016. EiendomsMegler 1 SR-Eiendom AS is to serve customers in collaboration with the group's other has strengthened its focus on Kristiansand with a new office business areas and help combine special expertise with centrally located in Markensgate, and a new district office in knowledge and an understanding of the local region. Lund. Together with the bank, EiendomsMegler 1 SR-Eiendom has established a new office in Sotra in Hordaland, and opened a separate office in Askøy in the same county. 32

EM1 31.12.2016 customers on the basis of discretionary mandates. The external Total income NOK 350 million customer base comprises pension funds, public and private Value of sales NOK 18.6 billion enterprises, and affluent individuals. Since its start-up in 1999, No. of sales 6,042 the company has produced a good, long-term, risk-adjusted Pre-tax profit NOK 16.2 million return for its customers, in both absolute and relative terms. No. of full-time equivalents 191 Pre-tax profit was NOK 28.0 million in 2016 (NOK 35.9 million). The reduction in the result from 2015 was primarily attributed SpareBank 1 SR-Finans AS to curtailment recognised in 2016. The equity fund SR-Utbytte SpareBank 1 SR-Finans AS is a financing company that offers produced a 9.84% return in 2016, which was 1.61% better than lease financing to the business sector, as well as car, boat and the respective benchmark index. The bond fund SR-Rente personal loans to retail customers. The company is the market produced 1.82% (benchmark 0.53%), and the combination fund leader in Rogaland and is planning to become a significantly SR-Kombinasjon produced 5.86% (benchmark 4.48%). stronger market actor in the leasing markets in Hordaland and the Agder counties as well. Its products are distributed via the SR-Forvaltning 31.12.2016 bank's distribution network, its own advisers, self-service soluti- Total income (gross) NOK 85.4 million ons, and external distributor channels. A decision was made in Assets under management NOK 9.5 billion September 2016 to carry out a parent/subsidiary merger betwe- Net new assets NOK -300 million en SpareBank 1 SR-Bank and SpareBank 1 SR-Finans in order to Pre-tax profit NOK 28 million strengthen the group's focus on leasing and become a stronger No. of full-time equivalents 12 actor in the area. The merger plan was signed by the boards of both companies and implemented on 1 January 2017. SpareBank 1 Regnskapshuset SR AS The company maintained a low cost/income ratio throughout The company was established in the first quarter of 2015 and 2016 and continuously focused on efficiency and digitalisation. has since its start-up grown from NOK 0 to NOK 82 million in Nonetheless, the result for 2016 was affected by high net turnover. At the start of 2017, the company has six offices, four losses. The increase in net losses is largely due to individual loss in Rogaland and two in Bergen, which in total serve more than provisions relating to a couple of the company's major leasing 2,000 customers. customers. Collective loss provisions were increased by SpareBank 1 Regnskapshuset SR made one acquisition in 2016, NOK 9.1 million based on the uncertainty that has characterised Regnskap Partner Bergen AS, which has an annual turnover of our market area in the last year. Loss provisions linked to the around NOK 12 million. other lending portfolio are considered to be at an acceptable level. Since its start-up, the company has gained a solid market position in Rogaland and Hordaland and is experiencing a SR-Finans 31.12.2016 good influx of new customers who need modern, efficient Total income NOK 231 million accounting services. At the same time, it is working on Total assets NOK 6.9 billion digitalising the current customer portfolio. Significant New sales NOK 2,388 million resources have been invested in internal infrastructure such Pre-tax profit NOK 84 million as a common IT platform and business system, as well as No. of full-time equivalents 31 a lot of professional and systems training of the company's 97 employees. Customers are demanding cloud services and the company is currently building up its own IT expertise SR-Forvaltning AS in order to produce bespoke solutions for customers, SR-Forvaltning is licensed to provide active management and irrespective of industry and size. securities management services. The management company has three securities funds: SR-Utbytte, SR-Kombinasjon and SpareBank 1 Regnskapshuset SR AS 31.12.2016 SR-Rente, which were all established around three years Total income NOK 82 million ago. The company also manages discretionary portfolios for Pre-tax profit NOK 2 million SpareBank 1 SR-Bank's pension fund, as well as for external No. of full-time equivalents 79 33

SR-Boligkreditt AS SpareBank 1 Banksamarbeidet DA owns the following SR-Boligkreditt is a wholly owned subsidiary and was establis- subsidiaries: hed in the second quarter of 2015. The purpose of the compa- • EiendomsMegler 1 Norge ny is to purchase home mortgages from SpareBank 1 SR-Bank • SpareBank 1 Kundesenter and funds this by issuing covered bonds. SR-Boligkreditt • SpareBank 1 Verdipapirservice enables SpareBank 1 SR-Bank to diversify and optimise its • SpareBank 1 ID AS funding. Moody's has given SR-Boligkreditt its best rating, Aaa. • SpareBank 1 Axept AS

SR-Boligkreditt AS 31.12.2016 The companies in SpareBank 1 Gruppen AS and Total income NOK 121 million SpareBank 1 Banksamarbeidet DA together constitute what is Assets under management NOK 29.4 billion called the Alliance. Pre-tax profit NOK 113 million No. of full-time equivalents 0 The SpareBank 1 Alliance's banks and LO also own direct stakes in the following companies: • BN Bank PART-OWNED COMPANIES: • SpareBank 1 Boligkreditt SpareBank 1 Gruppen AS • SpareBank 1 Kredittkort SpareBank 1 Gruppen AS is 100% owned by the SpareBank 1 • SpareBank 1 Næringskreditt banks and the Norwegian Confederation of Trade Unions (LO) • SpareBank 1 Markets with the following stakes: • SpareBank 1 Mobilbetaling

SpareBank 1 SR-Bank (19.5%), SpareBank 1 Nord-Norge (19.5%), The banks in the SpareBank 1 Alliance comprise SpareBank 1 SMN (19.5%), Sparebanken Hedmark (11%), 16 independent savings banks (legal entities). In total, Samarbeidende Sparebanker AS (19.5%), around 7,000 employees work in SpareBank 1 and around SpareBank 1 Oslo Akershus (1.4%) and the Norwegian 1,200 of them are employed in the Alliance. Federation of Trade Unions (LO) and affiliated unions (9.6%). SpareBank 1 Boligkreditt AS and SpareBank 1 Gruppen AS owns 100% of the shares in the SpareBank 1 Næringskreditt AS following subsidiaries: SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt • SpareBank 1 Forsikring (life insurance) AS are licensed mortgage companies that issue covered bonds • SpareBank 1 Skadeforsikring secured by home mortgage or commercial real estate • ODIN Forvaltning portfolios sold by the owner banks. The companies are owned • SpareBank 1 Medlemskort (51%) (administration of LOfavør) by the savings banks that make up the SpareBank 1 Alliance • SpareBank 1 Gruppen Finans (factoring and portfolio) and help ensure the owner banks have access to stable, • Conecto (debt recovery) long-term funding at competitive rates. At year-end 2016, SpareBank 1 Boligkreditt AS's total lending volume amounted SpareBank 1 Banksamarbeidet DA is 100% owned by the to NOK 174.5 billion, NOK 24.2 billion of which were home SpareBank 1 banks with varying stakes. The company delivers mortgages bought from SpareBank 1 SR-Bank. The bank holds business platforms and common management and develop- a 13.9% stake in the company and this is adjusted at the end of ment services to the alliance banks as customers, and helps to each year in line with its share of the volume sold. ensure that joint development and activities provide the banks with economies of scale and competitive advantages. The At year-end 2016, SpareBank 1 Næringskreditt AS's total lending company also owns and manages the alliance’s intellectual volume amounted to NOK 11.0 billion, NOK 0.5 billion of which property rights under the joint brand name SpareBank 1. were loans that had been bought from SpareBank 1 SR-Bank. SpareBank 1 Banksamarbeidet DA develops and delivers The bank owns a 21.9% stake in the company. common IT/mobile solutions, brands and marketing concepts, business concepts, products and services, expertise, BN Bank ASA analyses, processes, best practice solutions and purchases. SpareBank 1 SR-Bank and the other savings banks in the The company also conducts development work at three SpareBank 1 Alliance acquired Glitnir Bank ASA in the fourth competence centres – Training (Tromsø), Payment Services quarter of 2008. It has since been renamed BN Bank ASA. (Trondheim), and Credit Control (Stavanger). In turn, SpareBank 1 SR-Bank owns a 23.5% stake. 34

Group executive management

Arne Austreid Inglen Haugland CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT, ORGANISATION AND HR

Arne Austreid has been the chief executive of Haugland became Executive VP, Organisation and HR in SpareBank 1 SR-Bank since January 2011. February 2015. He is a trained petroleum engineer and holds an MBA She graduated in economics/administration from Stavanger (Master of Business Administration) from the University of University College (1996). She also holds a Masters in Aberdeen, UK. He has previously worked for Transocean ASA Management from BI Norwegian Business School (2009) and Prosafe SE: offshore, onshore and abroad, where his final and an MBA from the Norwegian School of Economics (NHH) position was President and CEO of Prosafe SE. He is the (2015-2016). She has worked in various positions in chair of the boards of SpareBank 1 Gruppen AS and SpareBank 1 SR-Bank since 1983, most recently as part of the SpareBank 1 Banksamarbeidet DA. retail market division's management team. She is a member of the boards of SpareBank 1 SR-Bank's pension fund and Stiftelsen Jærmuseet.

Frode Bø Inge Reinertsen EXECUTIVE VICE PRESIDENT, RISK MANAGEMENT AND CHIEF FINANCIAL OFFICER COMPLIANCE Inge Reinertsen became CFO in February 2010. Frode Bø became Executive VP Risk Management & Reinertsen has a degree in Business Administration from Compliance in January 2006. the Norwegian School of Economics in Bergen. He has He holds a Bachelor of Management and has also completed experience from various management positions in the a master's degree programme in operational auditing and risk SpareBank 1 SR-Bank Group and has worked for the group management at BI Norwegian Business School. Up to 2016, he since 2001. He is the chair of the board of SR-Boligkreditt AS, was also a lecturer in the Department of Industrial Economics, SR-Investering AS and SR-Forvaltning AS, the deputy Risk Management and Planning at the University of Stavanger. chair of SpareBank 1 Boligkreditt AS, and sits on the Frode Bø has worked for SpareBank 1 SR-Bank since 2001. boards of SpareBank 1 Gruppen Finans AS, SpareBank 1 SR-Bank's pension fund, and Conecto AS.

For more comprehensive CVs, see: www.sr-bank.no/ir. 35

Group executive management

Glenn Sæther Jan Friestad EXECUTIVE VICE PRESIDENT, BUSINESS SUPPORT AND EXECUTIVE VICE PRESIDENT, RETAIL MARKET DEVELOPMENT Jan Friestad became Executive VP Retail Market in August 2011. Glenn Sæther became Executive VP Business Support He holds a degree in economics and business administration & Development in May 2010. from Stavanger University College and has also taken various He was educated in economics and business administration master of management courses within marketing strategy and at BI Norwegian Business School. He has previously worked management at BI Norwegian Business School. He has worked as the chief accountant of the municipality of Sandnes, a for SpareBank 1 SR-Bank since 1988. He is the chairman of the consultant and marketing executive in Webcenter Unique ASA board of EiendomsMegler 1 SR-Eiendom AS and sits and a senior consultant in Helse Vest RHF. He has worked for on the boards of SpareBank 1 Kredittkort AS og SpareBank 1 SR-Bank since 2005. He is the chair of the board of SpareBank 1 Mobilbetaling. Finansparken Bjergsted AS and sits on the boards of SpareBank 1 Skadeforsikring AS and SpareBank 1 Regnskapshuset SR AS.

Tore Medhus Thor-Christian Haugland EXECUTIVE VICE PRESIDENT, CORPORATE MARKET EXECUTIVE VICE PRESIDENT, COMMUNICATIONS

Tore Medhus became Executive VP Corporate Market in Haugland Executive VP Communications in 2005. January 2000. He was educated at Stavanger University College, the University He holds a Master of Business and Marketing (Handelsøkonom) of Salford and BI Norwegian Business School in economics, from Oslo Business School/BI. He has previous experience from communications and management. He has previously Elcon Finans, Forende Credit Finans and Telenor. Medhus has worked as the sales and marketing manager for Radisson SAS worked for SpareBank 1 SR-Bank since 1994. He is the chair of in Stavanger and general manager in Brødrene Pedersen AS. the board of SpareBank 1 Regnskapshuset SR AS and deputy He has more than twenty years' experience from various chair of BN Bank ASA. positions in SpareBank 1 SR-Bank. Haugland sits on the board of Odin Forvaltning AS. 36

Corporate governance

The board of directors and executive management team of SpareBank 1 SR-Bank annually review the corporate governance principles and how they are functioning in the group. The formal requirements for this report follow from section 3-3b of the Accounting Act and the Oslo Stock Exchange's requirements concerning complying with, or explaining deviations from, the Norwegian Code of Practice for Corporate Governance.

Point 1 Implementation and reporting on combined knowledge and resources to: secure for the corporate governance region capital for business development and building homes; There are no significant deviations between the Code of contribute expertise; and help create good conditions for Practice and SpareBank 1 SR-Bank's compliance with it. continued growth. Active social involvement creates value One deviation is described below under section 14. directly by reducing risk, opening up new business opportunities, producing motivated staff and, not least, helping to maintain Objectives a good reputation. The corporate responsibility guidelines are Our aim is to stimulate Customer promises growth and development available on the company's website. in the region Always available Values Vision Understand the customer Prudence and respect best The customer's first Deviations from the Code of Practice: None choice in Southern and It pays Western Norway Committed and efficient We are here – even in turbulent times Position Nearer to people Point 2 Business and companies SpareBank 1 SR-Bank's business is explained in the Communication concept company's articles of association. SpareBank 1 SR-Bank's Always a bit closer purpose is to manage the funds controlled by the group in a prudent manner and in accordance with the applicable SpareBank 1 SR-Bank's objectives are to stimulate growth and legislation at any given time. development in the region. It is the very foundation of the SpareBank 1 SR-Bank can perform all normal banking trans­ company's business model. Allocating capital, for both business actions and banking services in accordance with applicable development and house building, is the most important social law. SpareBank 1 SR-Bank can also provide investment services task the company performs. SpareBank 1 SR-Bank's vision within the framework of the licences it holds at any given time. is: "The customer's first choice in Southern and Western The full text of the articles of association is available on the Norway". The values that will support our vision are: "Prudence company's website. The group's goals and main strategies are and respect. Committed and efficient." The vision and values described in the annual report. provide the basis for the group's code of conduct and corporate responsibility. Deviations from the Code of Practice: None SpareBank 1 SR-Bank ASA shall be characterised by high ethical standards and good corporate governance. The code of conduct states that employees of the group shall show respect Point 3 Equity and dividends and consideration, and that all communication shall be open, The board of directors assesses the capital situation honest and plain. The group's code of conduct is available from on an ongoing basis in light of the company's objectives, the bank's website. strategies and desired risk profile. As at 31 December 2016, the SpareBank 1 SR-Bank Group had equity of NOK 18.3 billion The group's corporate social responsibility is described in more (incl. allocated dividend). detail in a separate section of the group's annual report, which According to the applicable calculation rules for financial states that SpareBank 1 SR-Bank wants to use the group's institutions' capital ratio, the group had an overall capital ratio 37

of 17.5% and a common equity tier 1 capital ratio of 14.7% as Transactions with close associates at 31 December 2016. The board considers the capital ratio The instructions issued to the board stipulate that the board satisfactory, but assumes that it will have to strengthen the shall ensure that the company complies with sections 3-8 and capital ratio further in 2017 in line with the Norwegian 3-9 of the Public Limited Liability Companies Act in agreements authorities' capital buildup regulations. between the company and the parties listed therein. The board shall obtain the opinion of an independent third party when Dividends entering into agreements between the company and share- Particular account is taken of the group's capital ratio, including holders, board members or members of the group executive capital adequacy requirements and the group's targets and management team, or any close associates of these. All board strategic plans, when determining the annual dividend. The members and members of the group executive management level of the annual cash dividend will in the next few years team must immediately inform the board if they have a direct or take into account the fact that the banking sector is currently indirect interest in a transaction or agreement that the company building up capital to satisfy new capital requirements. Unless has entered into or is considering entering into. This applies capital requirements dictate otherwise, the board's goal will be even if the board member is deemed to be disqualified from to ensure that the payout ratio gradually increases in the lead considering the matter. up to 2018 in line with the group's dividend policy. Deviations from the Code of Practice: None Share buy back At its meeting on 27 April 2016, the general meeting authorised the board to acquire and register liens on the bank's own shares Point 5 Freely negotiable shares for up to 10% of the bank's share capital. The shares must be The bank's shares are listed on the Oslo Stock Exchange with acquired in the securities market via the Oslo Stock Exchange. the ticker SRBANK and are freely negotiable. The articles of ass­ Each share can be purchased at a price of between NOK 1 and ociation contain no restrictions on the negotiability of shares. NOK 150. The authorisation is valid for 12 months from the date it is adopted by the general meeting. Deviations from the Code of Practice: None

Capital increases The board is not currently authorised to increase capital in Point 6 General meetings SpareBank 1 SR-Bank. General meetings The supreme authority in SpareBank 1 SR-Bank is the general meeting, which represents the bank's shareholders. Pursuant Point 4 Equal treatment of shareholders and to the articles of association, the annual general meeting must transactions with close associates be held before the end of April each year. The notice and regis­ SpareBank 1 SR-Bank has one class of share. All shares have tration form must be sent to shareholders and published on equal voting rights. In the event of an increase in share capital, the group's website no later than 21 days before the date of the existing shareholders have pre-emptive rights, unless special meeting. Procedures for voting and submitting proposals must circumstances dictate that these rights can be waived. The be specified in the notice. The chair of the board, at least one background for such a waiver would then have to be explained. representative of the nomination committee, and the auditor In cases where the board asks the general meeting to authorise take part in the general meeting. Other board members are free a share buy back, any buy back must be carried out in the to attend. The chief executive and chief financial officer take market at market prices. part from the executive management team. The minutes of general meetings are available on the company's website. Largest shareholder Sparebankstiftelsen SR-Bank is SpareBank 1 SR-Bank's In general, resolutions require a simple majority. Decisions largest shareholder with a stake of 28.3%. The foundation was about disposals of shares, mergers, demergers, sales of a established on 1 January 2012 when SpareBank 1 SR-Bank substantial part of SpareBank 1 SR-Bank's operations or issuing was converted into a public limited company. Pursuant to the shares in the company require the approval of at least two foundation's articles of association, its purpose is to manage thirds of the votes and share capital represented at the general the shares that were transferred to the foundation upon its meeting. establishment and to exercise and maintain a significant long- term and stable stake in SpareBank 1 SR-Bank. Voting procedures allow for separate votes for each candidate The ownership interest must represent at least 25% of the to the various bodies. It is possible for shareholders to issue a outstanding shares of SpareBank 1 SR-Bank. proxy to others. A person is also appointed to act as a proxy 38

who can vote for shareholders. To the extent possible, the backgrounds and participation in board meetings in 2016 are proxy form is designed in such a way that it allows for voting on described in the presentation of the board in a separate chapter each agenda item and for each candidate standing for election. of the annual report and on the company's website. The board held eleven board meetings in 2016. Deviations from the Code of Practice: None Deviations from the Code of Practice: None

Point 7 Nomination committee Point 9 The work of the board of directors The nomination committee comprises up to five members The board's duties that are elected by the general meeting for a period of 2 years. The board's duties are set out in the board's instructions, which Sparebankstiftelsen SR-Bank must also be represented on the govern the board's duties and responsibilities, the board's nomination committee. The nomination committee provides procedures, the matters that must be considered by the board, detailed recommendations to the general meeting concerning and the rules for convening meetings and considering matters the election of the chair and members of the board and in meetings. The board has also issued instructions to the chief the chair and members of the nomination committee. The executive. The minutes are available on the company's website. recommendation should provide pertinent information about the candidates' background and independence. The nominati- The board adopts a meeting and work schedule every year that on committee also proposes the remuneration for members of encompasses strategy work, financial reports, prognoses for the the bodies mentioned above. The general meeting determines group and control work. Matters for the board are prepared by the nomination committees' remuneration. Information about the chief executive in cooperation with the chair of the board. the nomination committee and how to submit contributions Each year, the board evaluates its activities and competence, to the nomination committee can be found on the company's and discusses improvements to the organisation and execution website. of the board's work. The self-assessment report is available to the nomination committee. Deviations from the Code of Practice: None The board has established three permanent board committees, which consist of members of the company's board and are Point 8 Board of directors, composition and described in more detail below. The committees make no independence decisions but supervise, on behalf of the board, the executive Board of directors management team's work and prepare matters for the The board is elected by the general meeting for up to 2 years board's consideration within their areas of responsibility. at a time. The board consists of eight members, including two The committees are free to draw on resources in the group employee representatives. No members of the group executive and on resources, advice and recommendations from sources management team are members of the board. The compositi- outside the group. on of the board should be such that it can protect the interests of the shareholder community. A suitability assessment is made Audit committee when board members are being elected that takes into account The audit committee consists of three members who normally the need for continuity and independence. Ensuring the board meet six times a year. The composition of the committee has a balanced composition is also important. The combined satisfies the Code of Practice's independence and competence expertise of the elected board members must satisfy all the requirements. The audit committee must ensure that the requirements concerning qualifications, including any statutory group has an independent and effective external auditor and ones. Both genders shall be represented by at least 40% of the satisfactory financial reporting in accordance with the law and board members, ref. section 6-11a of the Public Limited Liability regulations. Companies Act, and the members must be independent of the company's executive management team. Risk committee The risk committee consists of four members who normally As at 31 December 2016, the board had eight members, meet six times a year. The committee is tasked with ensuring including two employee representatives. Three of the board's that the group's risk and capital management underpins the shareholder-elected members were women, as was one group's strategic development and goal attainment, while employee representative. All board members are independent ensuring financial stability and prudent asset management. of the bank's executive management team and important business connections. The individual board members' 39

Remuneration committee The board sets the group's risk profile, the overall limits, autho- The remuneration committee consists of three members who rities and guidelines for risk management, and ensures that the normally meet five times a year. The committee is tasked with group has a satisfactory capital base based on the risk borne by doing the preparatory work for the annual review of the group's the group and regulatory requirements. The board has adopted remuneration packages and the chief executive's contract and a code of conduct that contributes to raising awareness and terms by the whole board. compliance with the ethical standards set for the group.

Deviations from the Code of Practice: None First line of defence (day-to-day risk management) The chief executive is responsible for ensuring the group's risk management is monitored within the framework adopted Point 10 Risk management and internal control by the board. Business units are responsible for overall risk The board of SpareBank 1 SR-Bank focuses on risk management within their business area. management, which is an integral part of its work. The company's overall risk exposure and risk trends are monitored Second line of defence (general risk reporting and follow-up) via periodic risk reports for the company's executive manage- The risk management department is organised independent of ment team and board. General risk monitoring and reporting the business units and reports directly to the chief executive. is performed by the risk management department, which is The department is responsible for the ongoing development of independent of the business units. the risk management framework, including risk models and risk management systems. The department is also responsible for The bank's economics and finance department prepares independently monitoring and reporting risk exposure and for financial reports for SpareBank 1 SR-Bank and ensures that the ensuring the group complies with current laws and regulations. reporting complies with applicable laws, accounting standards, set accounting policies and the board's guidelines. Processes Third line of defence (independent confirmation) and controls have been established to ensure the quality The internal audit monitors that the risk management processes assurance of financial reporting. are targeted, effective and function as intended. The group's internal audit function has been outsourced, and this ensures The core purpose of the banking industry is to create value by that the function has the required independence, competence assuming deliberate and acceptable risk. The group therefore and capacity. The internal audit function reports to the board. invests significant resources in the further development of risk The internal audit function's reports and recommendations management systems and processes in line with leading for risk management improvements are reviewed and international practice. implemented on an ongoing basis in the group.

Risk and capital management in SpareBank 1 SR-Bank should SpareBank 1 SR-Bank is also cognisant of the need to have create financial and strategic added value through: good processes to ensure compliance with legislation and • a good risk culture characterised by a high awareness of risk regulations. Focus areas are continuous monitoring of management and the group's core values compliance with the current regulations and ensuring that • a good understanding of which risks drive earnings the group has adapted to future regulatory changes as best • pricing activities and products in line with their underlying as it can. risk, insofar as this is possible • having adequate financial strength based on a chosen risk SpareBank 1 SR-Bank's compliance function is organised profile and simultaneously striving for optimal capital allocati- independently of the business units. The department bears on to the various business areas overall responsibility for the framework, monitoring and • utilising diversification effects reporting within the area. The investment firm and subsidiaries • preventing single events seriously damaging the group's have their own compliance officers where this is required. financial position The internal control and systems also cover the company's core The framework is described in more detail in note 3 to the values, code of conduct and corporate responsibility. financial statements, as well as in the Pillar III document for SpareBank 1 SR-Bank, which is available on the bank's website. Deviations from the Code of Practice: None.

SpareBank 1 SR-Bank focuses on independence in management and control, and this responsibility is divided between the different roles in the organisation. 40

Point 11 Remuneration of the board of directors partners, lenders and investors. All reporting is based on The remuneration of the board's members and subcommittees openness and the equal treatment of market players in the is fixed by the general meeting based on the recommendations securities market. The group's financial calendar is published of the nomination committee. Board members' remuneration on the company's website. is not linked to financial performance or similar factors. None of the directors, other than the employee representatives, Deviations from the Code of Practice: None has responsibilities to the company beyond their board duties. Information about all remuneration paid to the individual board members is presented in note 22 to the annual financial Point 14 Take-overs statements. The board of directors of SpareBank 1 SR-Bank ASA will deal with any takeover bid in accordance with the principle of equal Deviations from the Code of Practice: None treatment of shareholders. At the same time, the board will ensure that shareholders receive the most comprehensive information possible in all situations that affect the interests of Point 12 Remuneration of executive personnel shareholders. When acquiring shares in a financial institution SpareBank 1 SR-bank has established a remuneration scheme involving any stake of more than 10% of the share capital, that applies to all employees. consent must be applied for from the Financial Supervisory Authority of Norway. The group's remuneration scheme shall be consistent with In connection with SpareBank 1 SR-Bank receiving permission the group's overall objectives, risk tolerance and long-term to convert to a public limited company, a condition was set interests and shall help to promote and provide incentives for that Sparebankstiftelsen SR-Bank would maintain an ownership good management and control of the group's risk, discourage stake that would amount to at least 25% of the shares issued in excessive or unwanted risk taking, and help to avoid conflicts of SpareBank 1 SR-Bank. interest, and shall comply with the regulations governing remu- neration schemes in financial institutions, investment firms and Deviations from the Code of Practice: management companies dated 1 December 2010. The total The board has not established explicit general principles for remuneration shall be competitive but the group shall not be handling take-over bids. The reason for this is the Financial a wage leader. It shall ensure that the group attracts, develops Undertakings Act’s restrictions on ownership of financial and retains competent employees over time. The scheme will institutions and the licensing conditions in connection with the ensure a reward model that is perceived to be fair, predictable conversion to an ASA.The board endorses the Code of Practice's and future-oriented and motivating. Fixed salaries shall make wording on this point. up the main element of the total remuneration, which shall also consist of variable pay, pensions and benefits in kind. Point 15 Auditor The board's guidelines for the remuneration of executive The external auditor presents an annual audit plan to the audit personnel are disclosed in note 22. committee and board. The audit committee recommends the election of an auditor Deviations from the Code of Practice: None to the board. The board holds at least one annual meeting with the auditor without the executive management team being present. The audit committee makes recommendations to Point 13 Information and communications the board concerning approval of the external auditor's fees. SpareBank 1 SR-Bank has dedicated pages on the company's The board then presents the proposals concerning fees to the web pages for investor information. The bank makes every general meeting for approval. effort to ensure that correct, relevant and timely information about the group’s performance and results inspires investor The external auditor shall provide the audit committee with market confidence. All price sensitive information is published a report on the main elements of the audit of the previous in both Norwegian and English. Stock exchange notices, annual financial year, including, in particular, any material weaknesses and interim reports, presentation materials and web-casts are identified with respect to internal control relating to the available on the company's website. financial reporting process.

Information for the market is distributed via quarterly investor Deviations from the Code of Practice: None presentations. Regular presentations are made to international 41

Report on corporate governance pursuant to section 3-3b of the Accounting Act

The report complies with the requirements of the act.

1. SpareBank 1 SR-Bank ASA complies with the Norwegian Code of Practice for Corporate Governance issued by the Norwegian Corporate Governance Board (NCGB). 2. The Code of Practice is available on www.nues.no 3. Any deviations from the Code of Practice are commented on in the board's report on corporate governance. 4. Point 10 of the report provides a description of the main elements of the internal control and risk management systems associated with financial reporting processes. 5. SpareBank 1 SR-Bank has no articles of association that deviate from chapter 5 of the Public Limited Liability Companies Act that deals with general meetings. 6. An account is provided of the composition of the board and its working committees, and a description is provided of the main elements of the guidelines and mandates for these bodies in points 8 and 9 of the report. 7. An account of the provisions of the articles of association that regulate the appo- intment and replacement of board members is provided in point 8 of the report. 8. An account of the provisions of the articles of association and authorisations that empower the board to decide that the enterprise will buy back or issue its own shares is provided in point 3 of the report. 42 The board of directors

Dag Mejdell Birthe Cecilie Lepsøe CHAIR OF THE BOARD BOARD MEMBER

Dag Mejdell (1957) has extensive experience from various Birthe Cecilie Lepsøe (1971) works as a partner in Vest management positions in business, most recently as the Corporate Advisors, in addition to board work. She was previo- CEO of Posten Norge AS from 2006 to 2016. From 2000 to usly the finance manager in Grieg Shipping Group, Bergen, and 2005 he was the CEO of Dyno Nobel ASA and before that also has many years of experience from DnB's shipping division. he worked for Dyno ASA for 19 years, the last three of which Lepsøe holds an MBA from BI Norwegian Business School and were as the CEO. Mejdell holds a 4-year degree in Economics has participated in the authorised financial analyst programme and Business Administration from the Norwegian School of in the Norwegian School of Economics (NHH). He sits on the Economics in Bergen. Chair of the boards of Norsk Hydro ASA, boards of Vest Corporate Advisors AS, Smedvig Eiendom AS, NSB AS and International Post Corporation CV, and deputy Smedvig Capital AS, Smedvig AS and StyreAkademiet in chair of the board of SAS AB. Chair of the board of Hordaland. Deputy member of the board of Askøy Kommunale SpareBank 1 SR-Bank ASA since 9 June 2016. Eiendomsselskap AS. Member of the board of No. of board meetings in 2016: 6 of 11 SpareBank 1 SR-Bank ASA since 1 January 2012. No. of shares in SpareBank 1 SR-Bank ASA*: 14,899 No. of board meetings in 2016: 11 of 11 No. of shares in SpareBank 1 SR-Bank ASA*: 0

Kate Henriksen Tor Dahle BOARD MEMBER BOARD MEMBER

Kate Henriksen (1960) is the COO of Miles AS. Tor Dahle, (1952) is the general manager in Sparebankstiftelsen Her previous positions include executive vice president, SR-Bank. His has previous experience from various retail market in Sparebanken Vest, marketing director/general management positions in SpareBank 1 SR-Bank ASA, including manager in Ementor, and various managerial positions in DnB. as CFO and latest as managing director in SR-Investering Henriksen has a degree in business administration from the AS. Dahle holds a master's degree in economics from the Norwegian School of Economics and Business Administration Norwegian School of Economics (NHH). He is the chair of the (NHH). She has also studied information technology and board of EM Software Partners AS. Member of the board of automation at Bergen College of Engineering, branding, and SpareBank 1 SR-Bank ASA since 6 June 2013. various management development programmes. Member of No. of board meetings in 2016: 11 of 11 the board of SpareBank 1 SR-Bank ASA since 4 June 2015. No. of shares in SpareBank 1 SR-Bank ASA*: 72,456,358 No. of board meetings in 2016: 11 of 11 No. of shares in SpareBank 1 SR-Bank ASA*: 0 43

Jorunn Johanne Sætre Odd Torland BOARD MEMBER BOARD MEMBER

Jorunn Johanne Sætre (1956) is the business development Odd Torland (1964) is the CEO of Smedvig AS in Stavanger, manager in AGR for the Norwegian market and heads the as well as the general manager of several companies owned department in Stavanger. She has experience from various by the Smedvig family, including Smedvig Eiendom AS and manage­ment positions in Halliburton, both globally and natio- Smedvig Capital AS. nally. From 2001-2011 she was chief executive of Halliburton He was the chief executive of Scana Industrier ASA from AS and responsible for the company's activities in Scandinavia. 2000 to 2005. Torland is a state authorised public accountant Sætre graduated as a chemical engineer from Bergen University from the Norwegian School of Economics (NHH). College and took petroleum engineering subjects at the University Odd Torland holds a number of board positions. Please see of Stavanger. Member of the corporate assembly of Norsk Hydro www.sr-bank.no/ir for a complete overview. Member of the and board member in Faroe Petroleum. Member of the board of board of SpareBank 1 SR-Bank ASA since 1 January 2012. SpareBank 1 SR-Bank ASA since 9 June 2016. No. of board meetings in 2016: 11 of 11 No. of board meetings in 2016: 6 of 11 No. of shares in SpareBank 1 SR-Bank ASA*: 0 No. of shares in SpareBank 1 SR-Bank ASA*: 0

Kristian Kristensen Sally Lund-Andersen EMPLOYEE REPRESENTATIVE BOARD MEMBER EMPLOYEE REPRESENTATIVE BOARD MEMBER

Kristian Kristensen (1982) is the deputy of the Finance Sector Sally Lund-Andersen (1961) is the main employee Union of Norway SpareBank 1 SR-Bank. He holds a Bachelor representative in SpareBank 1 SR-Bank ASA. Chair of the in Market Communication from BI Norwegian Business School. Finance Sector Union of Norway, Rogaland division. She sits on Deputy member of the board of the Finance Sector Union of the board of SpareBank 1 Gruppen AS. Member of the board of Norway, Rogaland division. Member of the board of SpareBank 1 SR-Bank ASA since 1 January 2012. SpareBank 1 SR-Bank ASA since 9 June 2016. No. of board meetings in 2016: 11 of 11 No. of board meetings in 2016: 6 of 11 No. of shares in SpareBank 1 SR-Bank ASA*: 941 No. of shares in SpareBank 1 SR-Bank ASA*: 3,020

*Inclusive of any shares owned by close associates and/or companies on whose behalf the person was chosen. More detailed CVs are available for all board members on: www.sr-bank.no/ir. 44

Board of Directors’ report

The SpareBank 1 SR-Bank Group achieved a pre-tax profit of NOK 2,158 million in 2016. The net profit for the year was NOK 1,755 million, an increase of NOK 9 million from NOK 1,746 million for 2015. The return on equity after tax was 10.0%, compared with 10.8% in 2015. The board of directors is very satisfied with the result for 2016.

Solid efforts by employees, good credit work and close one-off reduction in costs (curtailment) in connection with relationships with customers have been important drivers the switch to defined contribution pensions for all employees. behind a good result in a demanding year. Our market position Other operating costs were reduced by NOK 52 million (-5.7%) as Southern and Western Norway's leading financial group to NOK 866 million. The cost/income ratio, measured as was further strengthened by a net increase of 2,500 retail operating costs as a percentage of operating income, was customers aged 13 and above and more than 700 new reduced from 42.1% in 2015 to 40.9% in 2016. corporate customers. Impairment losses on loans totalled NOK 778 million, Lending, including loans sold to SpareBank 1 Boligkreditt AS compared with NOK 420 million in 2015. The higher and SpareBank 1 Næringskreditt AS, decreased by 0.9% in 2016. impairment losses on loans in 2016 were largely due to Deposits from customers decreased by 3.9% in 2016. The impairment losses linked to individual commitments within deposit coverage ratio, measured as deposits as a percentage oil-related activities, and collective impairment losses that were of total loans, was 54.5% at year-end 2016, compared with NOK 158 million higher. The increase in collective impairment 57.6% in 2015. losses was due to the continued uncertainty associated with low oil prices, as well as the prevailing market conditions and Net interest income rose to NOK 2,871 million in 2016, future development of economic activity in Norway in general compared with NOK 2,593 million in 2015. Net interest income and in Southern and Western Norway in particular. as a percentage of average total assets increased to 1.48% in 2016, from 1.42% in 2015. The increase was the result of The allocation of the year's profit is based on the parent bank's improved risk pricing for large parts of the corporate market distributable profit of NOK 1,921 million for 2016. portfolio and an improvement in the group's deposit margins. The board proposes that NOK 575 million be paid in dividends, corresponding to NOK 2.25 per share, while NOK 1,457 million Net commissions and other operating income totalled NOK be allocated to other equity and enhancing the group's financial 1,443 million in 2016, down from NOK 1,532 million in 2015. strength. The reduction is largely attributable to lower commissions from SpareBank 1 Boligkreditt AS due to the group buying back a The common equity tier 1 capital ratio increased from 13.3% at total of NOK 4 billion in loans from the mortgage company in the start of the year to 14.7% at year-end 2016. The tier 1 capital 2016. Other commissions increased by 1.6% from year-end ratio (including hybrid tier 1 capital) increased in the same 2015. The net return on financial investments amounted to period to 15.6% from 14.2% in 2015. NOK 654 million in 2016, compared with NOK 304 million in At year-end 2016, SpareBank 1 SR-Bank is in a solid financial 2015. This includes the profit shares from SpareBank 1 Gruppen position and well-equipped to meet the stricter regulatory AS and other associated companies. The profit from the sale of requirements for financial strength. The group is well- the shares in Visa Europe Ltd to Visa Inc. amounted to positioned to continue developing its leading position in NOK 94 million in 2016. Southern and Western Norway. The board has now set a target for the common equity tier 1 capital ratio of 15.0% by The group's operating costs for the year amounted to year-end 2017. NOK 2,032 million, compared with NOK 1,863 million in 2015, an increase of NOK 169 million (9.1%) since 2015. Personnel Nature of the business costs rose by NOK 221 million (23.4%) to NOK 1,166 million. The SpareBank 1 SR-Bank Group consists of the parent bank, The increase must be viewed in the context of the personnel SpareBank 1 SR-Bank ASA, and subsidiaries. costs in 2015 being reduced by NOK 226 million due to a

(Figures in brackets are linked to figures from the annual financial statements for 2015) 45

The most important subsidiaries are: SpareBank 1 SR-Finans AS, deposits intended for institutional customers. Overall, earnings EiendomsMegler 1 SR-Eiendom AS, from net interest income were better in 2016 than the year SR-Investering AS, SR-Forvaltning AS, SR-Boligkreditt AS, before. and SpareBank 1 Regnskapshuset SR AS. Net commissions and other operating income decreased SpareBank 1 SR-Bank's head office is in Stavanger and it has from 2015 to 2016. The reduction was primarily attributable to 36 branches in the counties of Rogaland, Hordaland, lower commissions from SpareBank 1 Boligkreditt AS due to Vest-Agder and Aust-Agder. The group's primary activities the buy back of a total of NOK 4 billion in home mortgages in are selling and procuring a wide range of financial products 2016. Income from sales of insurance, savings and investment and services, investments services, leasing, estate agency and products, and income from arrangement/customer fees were accounting services. unchanged to slightly higher than in 2015.

Group's performance The equity and interest rate markets were volatile in 2016, but SpareBank 1 SR-Bank recorded good progress in all of the greater optimism, especially in the second half of the year, group's business areas in 2016. The bank's position as the resulted in rising prices on the Oslo Stock Exchange and a market leader in Rogaland was strengthened or maintained positive development in credit spreads in general. Capital gains within both the retail market and the corporate market, and from securities totalled NOK 53 million for the full year. This at the same time the group strengthened its positions in was due to a combination of capital losses of NOK 156 million Hordaland and the Agder counties. The capital market division in the interest portfolio, which were counteracted by positive has established itself as the region's leading expert environment effects totalling NOK 158 million from hedging instruments, in its field. The group's position in the estate agency market has as well as capital gains of NOK 51 million from the portfolio of helped EiendomsMegler 1 become the largest chain of estate shares and equity certificates. agents in Norway. EiendomsMegler 1 SR-Eiendom AS is the market leader in Rogaland, and further strengthened its position Impairment losses on loans were NOK 778 million in 2016, in Hordaland and the Agder counties in 2016. compared with NOK 420 million in 2015, while collective impairment losses increased by NOK 158 million in 2016. The group's subsidiaries and its strategic stakes in the The increase in collective impairment losses was due to the SpareBank 1 Alliance's product companies make a significant continued uncertainty associated with low oil prices, as well as contribution to SpareBank 1 SR-Bank's earnings. As far as the the prevailing market conditions and expected development subsidiaries are concerned, the estate agency company of the level of activity in oil-related business. Impairments as a enjoyed a good level of activity despite the weak start to the percentage of gross loans, including loans from the mortgage year. The levels of activity in the financing company, companies, amounted to 0.42%. The board regards the quality SpareBank 1 SR-Finans AS, and the other subsidiaries remained of the loan portfolio and risk management as good. high. Developments in the group's market areas The banking market was again highly competitive in 2016. The Households' optimism about the development of the competition within financing home mortgages is more intense Norwegian economy improved slightly towards the end of than that within corporate loans due to stricter requirements 2016. Mainland Norway's gross domestic product (GDP) is vis-à-vis the industry's financial strength. The moderate growth expected to grow by around 1.5% in 2017, an increase from in lending was due to a combination of greater competition 0.7% in 2016. Low oil prices and a reduction in oil investments in the market for home mortgages, slightly lower growth in have dampened activity in the Norwegian economy to some the Norwegian economy, and weak to negative price growth extent. for homes in our main market, Rogaland. Loans to corporate customers were weakly negative for the year, which was the Demographic development trends are very important for the result of a market characterised by continued uncertainty group's framework conditions. For a long time now, the group's and some reluctance to invest. The margins for loans to retail primary area has seen high migration and population growth. customers were reduced in 2016, while the margins for loans The percentage of people with a disability is also significantly to corporate customers increased in the same period. Deposit lower than the national average. The population is relatively margins expanded within both the retail market and the cor- young in and around the regional centres, and along the coast porate market due to a heavy focus within the organisation on of Southern and Western Norway. The population growth trend strengthening income from deposits. The growth in deposits has continued in recent years and Rogaland and Hordaland was reduced by 3.9% in 2016 due to the repricing of some have in particular seen increases above the national average,

(Figures in brackets are linked to figures from the annual financial statements for 2015) 46

while growth in the Agder counties has been in line with the na- Sparebank 1 Næringskreditt AS. Commissions from these tional average. Statistics Norway's population growth forecasts companies amounted to NOK 149 million in 2016, reinforce expectations that growth in Rogaland and Hordaland compared with NOK 258 million in 2015. Net interest income especially will remain above the national average. On the other and commissions increased by a total of NOK 169 million, hand, the expected drop in oil investments in the next few years compared with 2015. The increase was a result of improved risk has made the aforementioned forecast more uncertain. pricing for large parts of the corporate market portfolio, as well as better deposit margins for the group. According to the Norwegian Labour and Welfare Administration (NAV) the unemployment rate in Norway was 2.8% at the end of December 2016. In Rogaland the unemployment rate was 4.5%, e ineres income nd ineres mrin in Hordaland it was 3.4%, and in Vest- Agder and Aust-Agder it NOK million 3 500 1,50% was 3.3% and 3.5% respectively. 3 000 1,45% The risk of lower growth in the Norwegian economy is still 2 500 1,40% linked to low oil prices. Estimates vary from simply a minor 2 000 1,35% negative effect to more serious consequences for employment, all depending on whether oil prices and investments on the 1 500 1,30%

Norwegian Continental Shelf remain low over time or not. 1 000 1,25%

In the last year, the Stavanger region has experienced a weaker 500 1,20% house price trend than the rest of the country with a drop in 0 1,15% prices of 2.6% compared with the national average of a 12.8% 2012 2013 2014 2015 2016 rise in prices. The poor price trend in the housing market, Net interest income Interest margin combined with expectations of lasting moderate to high unemployment going forward, may result in the building of few new homes in 2017. Other operating income Net commissions and other operating income totalled NOK 1,443 million in 2016, compared with NOK 1,532 million Pre-tax profit and return on equity in 2015. The NOK 89 million reduction since the previous NOK million year is attributable, in part, to a NOK 109 million reduction in 3 000 14 14,2 15% 12,4 commissions from SpareBank 1 Boligkreditt AS, primarily due 2 500 2601 10,8 to the group buying back loans from the mortgage company 2347 10 totalling NOK 4 billion in the 2016. 2 000 10% 2146 2158

1761 1 500 Income from estate agency services amounted to NOK 348 million in 2016, which represents a reduction of 1 000 5% NOK 35 million from 2015 and was due to less activity in the

500 housing market in the Stavanger region. Income was weakest in the first quarter of 2016 and the entire reduction in income 0 0% can be attributed to this quarter. Income rose during the spring 2012 2013 2014 2015 2016 of 2016 and the total income of NOK 279 million in the period Pre-tax profit Return on equity covering the second quarter up to and including the fourth quarter of 2016 was on a par with the same period in 2015. FINANCIAL PERFORMANCE Fees accrued in SpareBank 1 Regnskapshuset increased Net interest income from NOK 35 million in 2015 to NOK 81 million in 2016. The group's net interest income increased by NOK 278 million The company was established in the first quarter of 2015 from NOK 2,593 million to NOK 2,871 million in 2016. and the increase in income was due to the acquisition of a Net interest income amounted to 1.48% of average total assets, number of accounting firms in 2015. an increase from 1.42% in 2015. Other commissions increased by 1.1% in 2016, with both Net interest income must be seen in the context of the arrangement fees and income from money-transfer services commission income from SpareBank 1 Boligkreditt AS and and insurance making a positive contribution.

(Figures in brackets are linked to figures from the annual financial statements for 2015) 47

Net income from financial investments was NOK 654 million, At year-end 2016, the group had 1,172 full-time equivalents, an increase from NOK 304 million in 2015. Of this, dividends of which 1,127 were full-time employees. The full-time amounted to NOK 110 million (NOK 17 million) and included a equivalents figure fell by 18 in 2016, compared with an cash payment in the second quarter of 2016 of NOK 94 million increase of 28 in 2015. received in connection with the sale of Visa Europe Ltd to Visa Inc. Capital gains on securities amounted to NOK 53 million Losses and defaults (capital losses of NOK 224 million) and capital gains on interest In 2016, the group recognised net impairment losses on loans rate and currency trading amounted to NOK 107 million totalling NOK 778 million (NOK 420 million). This corresponds (NOK 89 million). Furthermore, income from ownership to impairments as a percentage of gross loans, including loans interests totalled NOK 384 million (NOK 422 million). to mortgage companies, of 0.42% (0.23%). Impairments on groups of loans were increased by NOK 158 million in 2016. The capital gains on securities amounting to NOK 53 million Closely monitoring customers and preventive work are in 2016 were primarily attributable to a combination of capital important tools for maintaining this good credit quality in losses of NOK 156 million in the interest portfolio, which were the group's loan portfolio in order to reduce future losses. counteracted by positive effects totalling NOK 158 million from hedging instruments, as well as capital gains of NOK 51 million Gross non-performing commitments amounted to from the portfolio of shares and equity certificates. NOK 1,070 million in 2016 (NOK 853 million). This represented 0.59% (0.46%) of gross lending, inclusive of loans sold to the Income from ownership interests in 2016 amounted to mortgage companies. The portfolio of impaired (not non-per- NOK 384 million (NOK 422 million). The share of the net profit forming) loans totalled NOK 1,141 million (NOK 548 million). for the year from SpareBank 1 Gruppen AS amounted to This represented 0.62% (0.30%) of gross lending, inclusive of NOK 318 million (NOK 251 million), from loans sold to the mortgage companies. Total non-performing SpareBank 1 Boligkreditt AS it amounted to NOK -14 million and impaired loans in 2016 came to NOK 2,211 million (NOK 91 million), and from SpareBank 1 Næringskreditt AS it (NOK 1,401 million). In terms of gross lending, including loans amounted to NOK 22 million (NOK 24 million). The share of the sold to the mortgage companies, this represents an increase profit from BN Bank AS was NOK 61 million (NOK 29 million). from 0.76% to 1.21% in 2016. The loan loss provisions ratio, measured as individual impairments as a percentage Operating costs of non-performing and impaired loans, was 26% (12%) and The group's operating costs totalled NOK 2,032 million in 2016. 28% (40%), respectively, at year-end 2016. This represents an increase of NOK 169 million (9.1%) compa- red with 2015. Personnel costs rose by NOK 221 million (23.4%) to NOK 1,166 million. In 2015, personnel costs were reduced ross nonperormin by NOK 226 million due to a one-off reduction in costs (curtai- NOK million 1 200 0,8% lment) in connection with the switch to defined contribution pensions for all employees. Taking this into account, as well as 1 000 other extraordinary items in 2015, personnel costs increased by 0,6% 800 NOK 23 million (2.0%) from 2015 to 2016. Other operating costs were reduced by NOK 52 million (-5.7%) to NOK 866 million. 600 0,4%

The group's cost/income ratio, costs measured as a percentage 400 of income, was reduced to 40.9% in 2016 (42.1%). 0,2% 200 Operating costs NOK million 0 0,0% 2 500 2,0% 2012 2013 2014 2015 2016 Gross defaults As % of gross loans 2 000 1,5% 1 500 Balance sheet 1,0% The group's total assets recognised on the balance sheet 1 000 increased from NOK 192.0 billion to NOK 193.4 billion in 2016.

0,5% The increase was due to the buy back of lending portfolios from 500 SpareBank 1 Boligkreditt AS.

0 0,0% 2012 2013 2014 2015 2016 Operating costs % of average total assets

(Figures in brackets are linked to figures from the annual financial statements for 2015) 48

At year-end 2016, SpareBank 1 SR-Bank had sold loans worth liquidity portfolio, having been replaced by other instruments to NOK 24.7 billion to SpareBank 1 Boligkreditt AS and SpareBank protect the group's liquidity. Deposits from the corporate market 1 Næringskreditt AS, compared with NOK 28.7 billion at year- and public sector accounted for 50.1% (52.9%) of the group's end 2015. If the loan portfolios of these part-owned mortgage customer deposits at year-end 2016. companies are taken into account, lending growth amounted to -0.9% and total loans NOK 182.3 billion at year-end 2016 At year-end 2016, the deposit coverage ratio, measured as (NOK 183.9 billion). Retail market lending rose by 0.1% and deposits as a percentage of gross loans, was 54.5% (57.6%). lending to the corporate market and public sector decreased by In a highly competitive market, the group has maintained both a 3.5%. The division between loans to the retail market (including good deposit coverage ratio and at the same time strengthened SpareBank 1 Boligkreditt AS) and the corporate market/public its long-term funding. The liquidity coverage ratio (LCR), which sector (including SpareBank 1 Næringskreditt AS) was 63.0% measures the group's liquidity coverage in a serious, 30-day to 37.0%, respectively, at year-end 2016, compared with 62.8% stress scenario, was 174% at year-end 2016 (128%). to 37.2% in 2015. In addition to ordinary customer deposits, the group had NOK 17.4 billion (NOK 17.1 billion) under management, primarily through SR-Forvaltning AS and ODIN Forvaltning AS. ross lons roh reil nd corpore mre 10% eposi covere rio

70% 5% 60% 50% 40% 0% 30% 20% -5% 2012 2013 2014 2015 2016 10%

Retail market, incl. Boligkreditt 0% Corporate market, incl. Næringskreditt 2012 2013 2014 2015 2016 Deposit Deposit coverage ratio, incl. loans coverage ratio to customers in SpareBank 1 Boligkreditt and Næringskreditt

ross lons reil nd corpore mre Retail market division NOK million 140 000 The retail market division's contribution before impairment losses on loans was NOK 1,251 million at year-end 2016. 120 000

The result was NOK 37 million higher than in 2015 due to 100 000 growth in commissions, exclusive of commissions from SpareBank 1 Boligkreditt, and lower costs. In 2016, the division 80 000

grew lending by 0.2% and deposits by 1.8%. The lower lending 60 000 growth was due to the competition situation and the somewhat

40 000 subdued to falling trend in house prices. Digital channels continued to grow in 2016. The digital channels saw an average 20 000 of 3 million monthly visits, compared with 2.5 million in 2015. 0 The number of digital sales increased by 25% in 2016 and most 2012 2013 2014 2015 2016 sales of savings accounts, funds and savings agreements now Retail market, incl. Boligkreditt take place in digital channels. The launch of new web pages, Corporate market, incl. Næringskreditt improved chat solutions, online meetings, biometric ID, and more products in digital channels will continue to grow digital traffic going forward. Deposits from customers fell by 3.9% in 2016 (9.8% increase) to NOK 85.9 billion (NOK 89.4 billion). Lower deposits are a result of The division gained 2,500 new customers aged 13 and above larger deposits from institutional customers, held as part of the in 2016. The systematic development of existing customer

(Figures in brackets are linked to figures from the annual financial statements for 2015) 49

portfolios, targeted growth and the launch of new payment Subsidiaries products contributed to this growth. The subsidiaries' products and services enable the group to offer a broader range to customers and enhance the bank's Net impairment losses on loans remained low and the earnings basis. Good internal teamwork and joint marketing percentage of non-performing loans over 30 days was 0.20% make the group a one-stop provider of financial products and of total loans at year-end 2016. services.

Corporate market division EiendomsMegler 1 SR-Eiendom AS is well represented The corporate market division's contribution before impairment throughout the group's entire market area and has 40 branches losses on loans was NOK 1,405 million in 2016. This is from Grimstad in the south to Bergen in the north. It is the NOK 319 million higher than in 2015. The division improved its leading estate agent in Rogaland and Vest-Agder, and is also risk pricing of large parts of the corporate market division's port- increasing its market share in both Hordaland and Aust-Agder. folio and this resulted in increased net interest income in 2016. The company achieved a pre-tax profit of NOK 16.2 million (NOK 29.6 million). The lower result in 2016 reflects the In the last 12 months, the division reduced its lending by situation in the housing market in the Stavanger region with 1.7% and deposits decreased by 2.6%. It is actively working on significantly fewer sales, especially in the first quarter of 2016. across-the-board sales of the group's products, and product Cost reducing programmes were implemented that produced coverage is increasing. Commissions and other operating good effects from the second quarter of 2016. The combined income were up compared with 2015. profit for the second to the fourth quarters of 2016 was NOK 4.1 million better than for the same period in 2015. Net individual impairments of NOK 510 million were recognised in 2016, compared with NOK 242 million in 2015. The division 6,042 properties were sold in 2016 compared with 6,551 in increased collective impairments by NOK 144 million in 2016 2015. In total the company sold properties worth almost due to external market conditions and lasting uncertainty NOK 19 billion. The supply of new assignments is satisfactory because of lower oil prices. The total level of impairments given the market situation, but overall it is around 11% lower was slightly higher than the long-term expected average, than at the same time last year. The company still enjoys a while the proportion of non-performing loans is moderate. strong market position in Rogaland with a market share of more than 40%, as well as good market positions in the Agder Balanced, profitable volume growth, good customer relations, counties and Hordaland. New orders for commercial property and a well-developed range of products are priority areas for for both lease and sale were good. The vacancy rate for office the division, as is closely monitoring the development of risk in premises has risen significantly in the last few years in the the portfolio. Stavanger region and a steadily increasing number of tenants are looking for premises suitable for the expected level of Capital market division activity going forward. The levels of activity in Bergen are still The division's areas of expertise complement traditional banking good within both the sale and leasing of commercial properties operations and the group's resources within securities activities and the company has established itself as a leading player in and management. Securities activities are organised under the commercial estate agency in the Bergen region. SR-Bank Markets brand and include customer and own account trading in fixed income instruments, foreign exchange and equ- SpareBank 1 SR-Finans AS's main activities are lease financing ities, analysis and corporate finance services. Capital manage- for the business sector and secured car and boat loans for the ment is performed via a separate subsidiary, SR-Forvaltning AS. retail market. The company achieved a pre-tax profit of NOK 84.3 million in 2016 (NOK 150.4 million). The lower result In 2016, SR-Bank Markets saw an operating result before the is largely due to individual loss provisions relating to a few of allocation of customer income to other business areas of the company's major leasing customers. Profit before impair- NOK 175 million (NOK 111 million). Higher income from ments and losses was NOK 176.2 million (NOK 190.1 million). interest rate and currency instruments, as well as a lower fall in Net lending decreased marginally by 0.7% during year and the value of the bank's bond portfolio, had a positive impact on amounted to NOK 6.9 billion at year-end 2016. the result in relation to the same period last year. The bulk of our income still comes from customer trading in interest rate 6,642 new contracts were established in 2016 (7,482). and currency instruments. The company's total new sales in 2016 amounted to NOK 2.4 billion (NOK 2.4 billion). Corporate finance has enjoyed good activity with more completed transactions, while income from the sale of equities In September 2016, a decision was made to carry out a and bonds has been relatively stable compared with 2015. parent/subsidiary merger between SpareBank 1 SR-Finans and

(Figures in brackets are linked to figures from the annual financial statements for 2015) 50

SpareBank 1 SR-Bank. The merger was completed on 1 January At year-end 2016, SpareBank 1 Boligkreditt AS's total lending 2017. volume amounted to NOK 174.5 billion, NOK 24.2 billion of which were home mortgages bought from SR-Forvaltning AS is an investment firm licensed to provide SpareBank 1 SR-Bank. The bank currently owns a 13.9% stake active management and fund management services. Pre-tax in the company. This is updated at the end of each year in line profit was NOK 28.1 million in 2016 (NOK 35.9 million). The with the volume sold. lower result in 2016 is primarily attributable to the reduction in personnel costs in 2015 linked to the reversed pensions At year-end 2016, SpareBank 1 Næringskreditt AS had made (curtailment). The company had assets of NOK 9.5 billion under loans totalling NOK 11.0 billion, NOK 0.5 billion of which were management at year-end 2016. This represents an increase of loans that had been bought from SpareBank 1 SR-Bank. The NOK 0.1 billion since the start of 2016. bank owns a 21.9% stake in the company.

SpareBank 1 Regnskapshuset SR AS was established in the first SpareBank 1 Alliance quarter of 2015 and has since its start-up grown from NOK 0 to The SpareBank 1 Alliance's purpose is to acquire and provide NOK 85 million in turnover. At the start of 2017, the company competitive financial services and products and to exploit has six offices, four in Rogaland and two in Bergen, and more economies of scale in the form of lower costs and/or higher than 2,000 customers. One acquisition was made in 2016, quality. Thus, the alliance helps ensure private individuals and Regnskap Partner Bergen AS, which has a turnover of around companies local roots, expertise and a simpler everyday life. NOK 12 million. The company was taken over with effect from The alliance is also intended to help secure the participating 1 January 2017. Regnskapshuset's acquisitions have provided banks' value creation for the benefit of their own regions and it with a solid foothold in Southern and Western Norway, and it the banks' owners. has built up a good foundation for further growth in the bank's market area. SpareBank 1 Regnskapshuset SR AS achieved a The SpareBank 1 banks run the alliance through their ownership pre-tax profit of NOK 1.6 million in 2016 (NOK 0.6 million), and participation in SpareBank 1 Banksamarbeidet DA, while the which includes NOK 1.6 million in depreciation of intangible development and operation of product companies is organised assets (NOK 0.8 million). through the banks' ownership of the holding company SpareBank 1 Gruppen AS. SR-Boligkreditt AS is a wholly owned subsidiary and was established in the second quarter of 2015. The purpose SpareBank 1 Gruppen AS is owned by of the company is to purchase home mortgages from SpareBank 1 SR-Bank ASA (19.5%), SpareBank 1 Nord-Norge SpareBank 1 SR-Bank and it funds this by issuing covered (19.5%), SpareBank 1 SMN (19.5%), Sparebanken Hedmark bonds. SR-Boligkreditt AS enables SpareBank 1 SR-Bank to (11%), Samarbeidende Sparebanker AS (19.5% – own by eleven diversify and optimise its funding. Moody's has given savings banks in Southern Norway), as well as the Norwegian SR-Boligkreditt AS its best rating, Aaa. The company achieved a Federation of Trade Unions (LO) and affiliated unions (9.6%), pre-tax profit of NOK 113.1 million in 2016 (NOK 39.3 million). and SpareBank 1 Oslo Akershus (1.4%) At year-end 2016, the company had issued covered bonds with a nominal value of NOK 26.9 billion. At year-end 2016, SpareBank 1 Gruppen AS owns 100% of the shares in SR-Boligkreditt had purchased loans for NOK 29.4 billion SpareBank 1 Forsikring AS, SpareBank 1 Skadeforsikring AS, (NOK 9.9 billion) from SpareBank 1 SR-Bank. ODIN Forvaltning AS, Conecto AS, SpareBank 1 Medlemskort AS, andSpareBank 1 Gruppen Finans AS. Associated companies SpareBank 1 Gruppen AS delivered a pre-tax profit of NOK SpareBank 1 Boligkreditt AS and 2,019 million in 2016 (NOK 1,287 million). The stronger result SpareBank 1 Næringskreditt AS in 2016 is primarily attributable to an improvement in the result SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt of the life insurance company due to the improvement in the AS are mortgage companies operating under licences issued risk result, as well as a better financial return in the company by the Financial Supervisory Authority of Norway and issue portfolio. Underlying operations in other companies in covered bonds (with pre-emptive rights) on the bank's home SpareBank 1 Gruppen AS were stable and good. mortgage and commercial properties portfolios respectively SpareBank 1 SR-Bank's share of the profit in 2016 was that are bought from the owner banks. The companies NOK 318 million, compared with NOK 251 million in 2015. are owned by the savings banks that make up the SpareBank 1 Alliance and help ensure the owner banks have SpareBank 1 Gruppen AS bears administrative responsibility for access to stable, long-term funding at competitive rates. the collaboration processes in the SpareBank 1 Alliance, where technology, brands, expertise, common processes/application

(Figures in brackets are linked to figures from the annual financial statements for 2015) 51

of best practice, and procurement are key elements. The The corporate governance principles are based on three main alliance is also engaged in development work through three pillars: openness, predictability and transparency. The group has resource centres: learning (Tromsø), payments (Trondheim) and defined the following main corporate governance principles: credit (Stavanger). Among other things, the alliance focused more heavily on refining self-service digital and • Value creation for shareholders and other interest groups mobile solutions in 2016. • A structure that ensures goal-oriented and independent management and control BN Bank ASA • Systems that ensure good measurability and accountability SpareBank 1 SR-Bank and the other savings banks in the • Effective risk management SpareBank 1 Alliance acquired Glitnir Bank ASA towards the end • Well set-out, easily understood and timely information of 2008. It has since been renamed BN Bank ASA. SpareBank • Equal treatment of shareholders and a balanced relationship with 1 SR-Bank's owned a 23.5% stake in it at year-end 2016. In other interest groups autumn 2015, the board of BN Bank laid out a new strategy • Compliance with legislation, regulations and ethical standards that involved focusing on the retail market division. The work of winding down activities in the corporate market division has SpareBank 1 SR-Bank has no provisions in its articles of been performed on a controlled basis since then. The share association that restrict the right to sell the company's shares. of the profit from BN Bank ASA increased to NOK 61 million The board is not aware of any agreements between share­ in 2016 from NOK 29 million in 2015. This was due to a holders that limit opportunities to sell shares or to exercise combination of recognising gains from the sale of Visa as voting rights for shares. According to the terms of the licence, income and a good underlying operating result. the Sparebankstiftelsen SR-Bank foundation must own at least 25% of outstanding shares. The board approves the guidelines Events after the balance sheet date for the remuneration of executive personnel each year. The As at 31 December 2016, SpareBank 1 SR-Bank owned guiding policies for the coming financial year are presented 19.7% of the shares in SpareBank 1 Mobilbetaling AS (mCASH). to the general meeting for an advisory vote, while the binding On 13 February 2017, it was announced that more than 100 guidelines for the allocation of shares, etc. as part of the group's Norwegian banks would become part-owners of Vipps togeth- remuneration scheme for the coming financial year are presen- er with DnB. This includes the banks in the SpareBank 1 Alliance ted to the general meeting for approval. with their mobile payment solution, mCASH. The SpareBank 1 Alliance will own 25% and become the The group's corporate governance policy is based on the second largest owner of the new company after the Norwegian Code of Practice for Corporate Governance. Further DnB Group, which will be the largest owner with 52%. information on corporate governance, pursuant to section 3-3b of the Accounting Act, is provided in a separate section of No material events have been registered after 31 December the annual report. There is also a special section on corporate 2016 that affect the annual financial statements as prepared. social responsibility. The information has also been published on: www.sr-bank.no/ir. Accounting policies SpareBank 1 SR-Bank prepares its parent bank and consolidated Risk management financial statements in accordance with International Financial SpareBank 1 SR-Bank's core activity is to create value by Reporting Standards (IFRS) as adopted by the EU. assuming recognised and acceptable risks. The group, therefore, invests significant resources in maintaining and The description of the accounting policies applied by the group, developing risk management systems and processes that in note 2 to the accounts, sets out a more detailed account of are in line with leading international practice. The board of important factors relating to treatment for accounting purposes SpareBank 1 SR-Bank has established its own risk committee. in accordance with IFRS. The risk and capital management should underpin the group's Corporate governance strategic development and goal attainment, while ensuring Corporate governance in SpareBank 1 SR-Bank comprises the financial stability and prudent asset management. This shall be objectives and overriding principles according to which the achieved through: group is governed and controlled, to secure the interests of shareholders, customers and other stakeholders. Governance • a good risk culture characterised by a high awareness of risk of the group's activities shall ensure prudent asset management management and the group's core values and greater assurance that publicly declared goals and • a good understanding of which risks drive earnings strategies are reached and realised.

(Figures in brackets are linked to figures from the annual financial statements for 2015) 52

• pricing activities and products in line with their underlying Risk activities relating to trading in foreign exchange, interest risk, insofar as this is possible rate instruments and securities arise within the limits, authorities • having adequate financial strength based on a chosen and credit lines for counterparties that are adopted at any time. risk profile and simultaneously striving for optimal capital SpareBank 1 SR-Bank assumes, to a limited extent, the interest allocation to the various business areas rate and foreign exchange risk in connection with trading • utilising diversification effects activities for own account. As far as possible, income from • preventing single events seriously damaging the group's operations is generated in the form of customer margins in financial position order to ensure earnings are as stable and reliable as possible. The group's risk is quantified, inter alia, by computing expected losses and risk-adjusted capital so it can cover any unexpected The group's market risk exposure is deemed moderate. losses. Expected losses describe the amount one statistically expects to lose during a 12-month period, while risk-adjusted Liquidity risk capital describes how much capital the group believes it needs The bank's framework for managing liquidity risk shall reflect to cover the actual risk to which the group is exposed. the bank's conservative risk profile. Liquidity risk shall be low. The group's lending is financed primarily by customer deposits The most important risks the group is exposed to are credit risk, and long-term funding, including the sale of home mortgage market risk, liquidity risk, operational risk and ownership risk. portfolios to SpareBank 1 Boligkreditt AS. The liquidity risk is restricted by diversifying securities issued in terms of markets, Credit risk funding sources, instruments and maturity periods. Credit risk is managed via the framework procedures for gran- ting credit, monitoring commitments and portfolio manage- The group had good access to funding in 2016. ment. The general credit strategy stipulates that the group shall Deposits from customers represent the group's main source of have a moderate risk profile. Non-performance rose slightly funding. Deposits decreased by NOK 3.5 billion for the group as in 2016. Lending losses increased as a result of increased a whole in 2016. The deposit coverage ratio fell from 57.6% at individual loss provisions and impairment losses on groups of year-end 2015 to 54.5% at year-end 2016, primarily due to the loans. The group increased collective impairment losses due to buy back of loan portfolios from SpareBank 1 Boligkreditt AS in external market conditions and greater uncertainty because of 2016, but also due to a somewhat lower volume of deposits. low oil prices. A good and sustained focus on risk management has helped maintain the good credit quality of the portfolio. Funding costs fell slightly during 2016 and access to market funding was good. The risk premium for the money market The quality of the corporate market portfolio is good and stable interest rate (3-month NIBOR) increased through the year. when compared with 2015. The quality of the retail market SpareBank 1 SR-Bank has continued to focus on adapting to portfolio is very good and its development in 2016 was char­ the new regulatory requirements by acquiring more long-term acterised by unchanged loan-to-collateral value ratios and a funding and increasing holdings of liquid securities. The liquidity low risk profile in the portfolio. Most of the portfolio is secured buffer amounted to NOK 24.7 billion at year-end 2016. This by mortgages on real estate, and the LTV is, for the most part, level ensures that the bank can maintain normal operations for moderate. This implies that potential losses are limited as long 25 months without access to extra funding. In addition to the as the values are not significantly impaired. liquidity buffer, the bank has NOK 14.8 billion in home mortga- ges ready for covered bond funding. Market risk Market risk is managed on the basis of conservative limits for Operational risk positions in interest instruments and currencies, as well as The processes for managing operational risk shall ensure, as far investments in shares and bonds. The board reviews and as possible, that no single incident caused by operational risk approves the limits at least once a year. is able to seriously harm the group's financial position. The risk management is based on insight into and an understanding of Part of the group's market risk is linked to investments in bonds what creates and drives operational risk in the group, and must, and certificates. At the end of 2016, the group's holdings of as far as possible, reconcile effective processes with the desired liquid assets in the form of bonds and certificates totalled level of exposure. NOK 21.0 billion. When quantifying risks linked to impairment in the value of the liquidity portfolio, SpareBank 1 SR-Bank The group uses a systematic process to identify and quantify distinguishes between systematic risk (market risk) and operational risks that the group is exposed to at any time, and unsystematic risk (default risk). Default risk associated with the it has established its own systems for reporting adverse events aforementioned portfolio is quantified as credit risk. and following up improvement measures. This helps SpareBank 1 SR-Bank continue to be a dominant organisation

(Figures in brackets are linked to figures from the annual financial statements for 2015) 53

over time through proper prioritisation and continuous • Competitive terms and ample access to long-term funding improvement. from the capital markets • Exploitation of growth opportunities in the group's defined As part of its on-going skills enhancement, market area. SpareBank 1 SR-Bank has established a partnership with the University of Stavanger and the SpareBank 1 Alliance for a research and development project that will deliver new ore eiy ier cpil ier cpil nd cpil rio knowledge and specific tools for better managing operational risk in the financial industry. The goal of the project is to esta- 20% blish the Norwegian financial industry as a professional centre in Europe for education, innovation and applications relating 15% to methods and processes for managing operational risk, and to position the alliance and University of Stavanger as leading environments within the management of operational risk. 10%

Ownership risk 5% Ownership risk: the risk that SpareBank 1 SR-Bank bears if it suffers negative results from stakes in strategically owned companies and/or the need to inject fresh capital into these 0% companies. Ownership is defined as companies in which 2012 2013 2014 2015 2016 SpareBank 1 SR-Bank has a significant stake and influence. Core equity capital ratio SpareBank 1 SR-Bank is mainly exposed to ownership risk Tier 1 capital ratio Capital ratio through its stakes in SpareBank 1 Gruppen AS (19.5%), SpareBank 1 Boligkreditt AS (13.9%), A capital plan is drawn up every year to ensure long-term, SpareBank 1 Næringskreditt AS (21.9%) and BN Bank ASA (23.5%). effective capital management. These projections take into account both expected developments in the coming years and Compliance a situation involving a serious economic recession over several SpareBank 1 SR-Bank's goal is to have good processes years. Various stress tests are carried out of both individual to ensure compliance with legislation and regulations. factors and scenario analyses where the group is exposed to a The board adopts the group's compliance policy that describes range of negative macroeconomic events over several years. the main principles for responsibility and organisation. In addition, SpareBank 1 SR-Bank has prepared contingency plans for dealing with such crises as effectively as possible The EU's work on harmonising regulations within the EU/EEA should they nevertheless arise. SpareBank 1 SR-Bank is in a solid results in new regulations to which the group must adapt. The financial position and is a market leader in the region in Norway group continuously assesses the best way of adapting to new enjoying the strongest growth in the last 10 years. At year-end regulations and rules to ensure compliance and effectiveness of 2016, the common equity tier 1 capital ratio was 14.7% (13.3%) the organisation. while the tier 1 capital ratio was 15.6% (14.2%) and the capital New regulations and rules that affect the group's operations ratio was 17.5% (16.7%). Because of the transitional rules, the must be included in routines and guidelines on an ongoing minimum requirement for capital adequacy cannot amount basis. to less than 80% of the corresponding amount calculated according to the Basel I rules. SpareBank 1 SR-Bank's compliance function is the responsibility of the risk management and compliance department and is The total common equity tier 1 capital ratio requirement for organised independently of the business units. The department SpareBank 1 SR-Bank, inclusive of the countercyclical buffer bears overall responsibility for the framework, monitoring and and Pillar 2 premium, as at 31 December 2016 was 13.5% and reporting within the area. the capital ratio requirement was 17.0%. The requirements are met by a good margin. Banks classified as systemically Capital management important financial institutions are also subject to a special Capital management shall ensure that SpareBank 1 SR-Bank capital buffer requirement. SpareBank 1 SR-Bank has not been balances the relationship between: identified as a systemically important financial institution. • Effective funding and capital allocation in relation to the group's strategic objectives and adopted business strategy There is a countercyclical capital buffer requirement in Norway • Competitive returns on equity in the range of 0-2.5% in the form of common equity tier • Satisfactory capital ratio on the basis of the adopted risk 1 capital. The purpose of the countercyclical capital buffer is to profile and the regulations issued by the authorities, as well as the demands of market players at any time (Figures in brackets are linked to figures from the annual financial statements for 2015) 54

make the banks more solid and robust in relation to lending los- Health, safety and the environment ses. The capital buffer requirement was 1.5 percentage points Health, safety and environment (HSE) work is a high priority in as at 31 December 2016. The Ministry of Finance has decided the group. A good working structure has been established and to increase the requirement to 2.0 percentage points from we deem the cooperation with employees' representatives to 31 December 2017. The total minimum requirement for common be very good. Compulsory HSE training has been introduced equity tier 1 capital will thus increase to 14.0% at year-end 2017. for all managers and safety representatives and the group constantly strives to improve safety routines through various The Pillar 2 premium is an institution-specific premium training measures. intended to ensure that Norwegian banks have adequate capital to cover the risk associated with operations, including risks not The group strives to ensure sustainable environmental covered by the regulatory minimum requirement. The Financial management and seeks to contribute both through its own Supervisory Authority of Norway has in its assessment of the operations and by influencing customers and suppliers to make group stipulated a Pillar 2 premium of 2.0%. environmental and climate-friendly choices. The group's direct environmental impact is primarily related to greenhouse gas External audit emissions and waste production through office operations, The group's external auditor is PricewaterhouseCoopers AS while its indirect impact is through the purchase of goods and (PwC). services, as well as demands made of customers and suppliers.

Internal audit Sick leave and the inclusive workplace scheme Internal audits are carried out by Ernst & Young AS (EY). The group has a set a long-time target for the healthy rate of Internal audits report directly to the board. 97%. At the year-end 2016, the healthy rate was 96.4% (96.9 %). Over time, the group has worked comprehensively Employees and working environment and systemically to promote and improve the employees' SpareBank 1 SR-Bank's employees are its most important health, maintain this over time and help those who become resources for creating value for the benefit of its customers, the sick to return to work. The group constantly strives to lower sick region and the bank. At year-end 2016, the group had 1,172 leave through participation in the Inclusive Workplace scheme full-time equivalents, of which 1,127 were full-time employees. (IW) and good follow-up by managers. The number of full-time equivalents decreased by 18 during the year. There are 38 fewer full-time equivalents in the parent SpareBank 1 SR-Bank has prepared a life-phase document in bank, while the number of full-time equivalents in subsidiaries order to offer employees a range of measures that are suited increased by 20 in the same period, primarily because of the to the individual's life-phase and that will generally improve SpareBank 1 Regnskapshuset SR venture. The group is an the employee's everyday life and contribute to a rise in the important knowledge-based workplace in the region and is per- retirement age. The target retirement age is 64.5 and the ceived as an attractive employer providing good development average retirement age in 2016 was 63.9, a decrease of opportunities. 0.2 years from 2015.

The group's organisational and working environment surveys Gender equality for 2016 show that employees are satisfied and have a good SpareBank 1 SR-Bank shall provide employees with equal relationship with the group as an employer. The surveys are opportunities for personal development, pay and other career reviewed and followed up in all units in order to ensure a related issues. In 2016, women accounted for 55% of the full positive development and strengthen a healthy working time equivalents in the group and men 45%. There was no environment characterised by a long-term approach, openness, significant change in the gender ratio from 2015. The average honesty and security in line with the group's basic values. age was 44.7 years old and the average length of service 13.3 years. The group executive management team comprises Skills development eight men and one woman. The proportion of women The group has purposely invested in developing in-house managers in the group decreased from 43.0% to 42.0% in 2016. expertise over many years in order to satisfy the growing demands of customers. The goal is for customers to recognise The bank's shares that the company offers better advice and service than its The share price for the bank's shares (SRBANK) was NOK 60.75 competition. On average, between 5 and 10% of working hours at year-end 2016. This represents an increase of 54.6% since are spent on updating and developing skills. More than NOK year-end 2015. The main Oslo Stock Exchange index rose 8,000 per employee was invested in skills development in 2016. by 12.1% in the same period. Trading in the SRBANK share increased throughout 2016.

(Figures in brackets are linked to figures from the annual financial statements for 2015) 55

There were 10,428 (10,153) shareholders of SRBANK at year- In the opinion of the board, following the proposed allocations end 2016. The proportion owned by foreign companies and and other completed and planned actions, SpareBank 1 SR-Bank's individuals was 19.1%, whilst 49.9% were owned by residents financial strength will be good and it will have sufficient flexi­ of Rogaland, the Agder counties and Hordaland. The 20 largest bility to support the group's planned activities for the future. shareholders owned a total of 56.9% of the shares. The bank holds 108,983 treasury shares, while group employees owned ividend per shre nd direc rern NOK 1.8%. 2,5 5%

The group profit per share was NOK 6.87 in 2016. 2,0 4% The board proposes the payment of a dividend of NOK 2.25 per share for 2016, which corresponds to around 32.8% of 1,5 3% the group profit per share. The dividend for the 2015 financial year was NOK 1.50, which corresponds to a distribution rate of 1,0 2% around 22.0%. 0,5 1% Going concern Financial strength was significantly strengthened in 2016. The 0,0 0% outlook for financial performance also appears good despite 2012 2013 2014 2015 2016 continued uncertainty concerning general macro-economic Dividend per share, NOK Direct return, % conditions. Together with implemented and planned measures, this contributes to a good prospect of further progress for the *Dividend divided by share price at year end. group in 2017. The annual financial statements have been prepared on the assumption that the group is a going concern. Outlook for 2017 Allocation of profit for the year/dividend Moderate growth is expected in the global economy. SpareBank 1 SR-Bank's financial goal for its activities is to Norwegian economic growth is expected to be low and still achieve results that provide a good, stable return on the affected by the downturn in oil-related activities. Oil invest- Bank's equity, thus creating value for the owners in the form of ments decreased by 16% in 2016 compared with the year competitive dividends and a higher share price. Consideration before. The Norwegian Petroleum Directorate expects a further is given to financial needs, including capital adequacy require- reduction in investments in the petroleum sector of around ments and the group's targets and strategic plans, when deter- 10% in 2017 compared with 2016. This will probably affect the mining the annual dividend. Unless capital requirements dictate overall level of activity in the region in 2017 as well. otherwise, the goal of the board is for up to half of the annual net profit for the year to be distributed as dividends. Both oil companies and the supply industry have rationalised operations and reduced costs to adapt to the new level of The dividend distributed is based on the parent bank's profit. turnover. This is affecting the overall level of activity, although The parent company's profit for 2016 was NOK 1,921 million some export-oriented industries are experiencing growth due or NOK 7.51 per share. In line with the dividend policy, various to the weak Norwegian krone. Low to moderate activity is factors are taken into consideration when proposing dividends, expected within the construction industry, as well as in some with particular weight being attached to capital requirements commodity segments. At the same time as the expectations and the tier 1 capital ratio. indicate low growth, at the start of 2017 there is significantly The board, therefore, proposes a dividend of NOK 2.25 per greater optimism around than there was at the start of 2016. share for 2016, which corresponds to around 32.8% of the The main index of the bank's business survey of economic group profit per share. activity is now at 54% compared with 47% at the same time last year, which shows that a majority of the 600 selected compa- The board proposes the following allocations for the 2016 nies in our market area that provide the basis for the survey are financial year: more optimistic about the future. Continued, stable activity NOK million is expected within most sectors in Hordaland and the Agder Parent company net profit for the year 1,921 counties. Transferred from the fund for valuation differences 111 Distributable 2,032 The group's long-term return on equity target is at least 11%. Dividend (NOK 2.25 per share) 575 The group also has a common equity tier 1 capital ratio target Retained earnings 1,457 of at least 15% by the end of 2017. SpareBank 1 SR-Bank is Total 2,032 a solid, profitable group and has in recent years increased its

(Figures in brackets are linked to figures from the annual financial statements for 2015) 56

financial strength in line with the authorities' requirements. The group's prognoses take account of the fact that the group This was achieved through solid earnings via a business model will in 2017 again have to make the necessary impairments that involving good, broad and efficient operations. The group exceed the average in an economic cycle. Some of the bank's achieved its common equity tier 1 capital ratio target of 14.0% customers in the oil industry are experiencing a prolonged, by year-end 2016 by a good margin and also expects to be able demanding market. At the same time, macroeconomic indica- to carry out the necessary capital buildup by the end of 2017. tors such as unemployment and house prices have performed The conditions should also be right for increasing the dividend better than previously expected. Given this, the need for impair- slightly in 2017 and normalising dividends from and including ments in 2017 is expected to be on a par with the level in 2016, 2018. or slightly lower. The expected need for impairments for 2016 was NOK 500-700 million, while actual impairment losses on Better risk pricing was introduced in some segments of the loans amounted to NOK 778 million. The difference was corporate market in 2016 and at the start of 2017 the group primarily due to an unexpected event that resulted in a large will increase prices for loans in the retail market. The lending loss provision for one of the group's commitments within oil volume is expected to increase by 2-4% in 2017 with loans to services. The board would like to stress that a great deal of un- retail customers expected to increase slightly more than loans certainty is associated with all assessments of future conditions. to corporate customers. As a consequence of technological developments, changes in customer behaviour and the lower A good mutual relationship between the region's inhabitants, activity in the region, the group has implemented several the business sector and the bank is important for growth in the cost-reducing measures. group's market area. The board would like to thank the group's Investments are being made in new technology to improve customers, owners and other partners for their loyal support of the customer experience and increase sales. Overall, these SpareBank 1 SR-Bank in 2016 and assure them that it will make measures will ensure the group is competitive going forward. every effort to ensure that this teamwork continues. The board would also like to thank the group's employees and elected officers for their good contributions and teamwork in 2016.

Stavanger, 8 March 2017

Dag Mejdell Chair of the board Kate Henriksen Tor Dahle

Birthe Cecilie Lepsøe Jorunn Johanne Sætre Odd Torland

Sally Lund-Andersen Kristian Kristensen Arne Austreid Employee representative Employee representative Chief Executive Officer Annual financial statements

Income statement 58 Balance sheet 59 Statement of Changes in Equity 60 Statement of Cash Flow 61 Note 1 General Information 62 Note 2 Accounting Policies 62 Note 3 Critical Estimates and Judgements Concerning use of the Accounting Policies 69 Note 4 Segment Reporting 70 Note 5 Capital Adequacy 72 Note 6 Financial Risk Management 74 Credit Risk Management Note 7 Financial Institutions - Receivables and Liabilities 77 Note 8 Loans to Customers 78 Note 9 Loans Sold to SpareBank 1 BoligKreditt and SpareBank 1 NæringsKreditt 80 Note 10 Age Distribution of due but not written down loans 81 Note 11 Impairment Losses on loans and guarantees 82 Note 12 Credit Risk Exposure for each internal risk class 84 Note 13 Maximum Credit Risk Exposure 85 Note 14 Credit Quality per class of Financial Asset 86 Market Risk Note 15 Market Risk related to Interest Rate Risk 88 Note 16 Market Risk related to Currency Risk 89 Liquidity Risk Note 17 Liquidity Risk 90 Note 18 Maturity Analysis of assets and debt/liabilities 91 Income Statement Note 19 Net Interest Income 93 Note 20 Net Commissions and other operating income 93 Note 21 Net Income/Losses from financial instruments 94 Note 22 Remuneration Statement, personnel costs and benefits for executive personnel and elected representatives 95 Note 23 Other Operating Costs 99 Note 24 Pensions 100 Note 25 Tax 104 Balance Sheet Note 26 Classification of Financial Instruments 105 Note 27 Certificates and Bonds 107 Note 28 Financial Derivatives 108 Note 29 Equities, units and other equity interests 109 Note 30 Intangible Assets 111 Note 31 Tangible Fixed Assets 112 Note 32 Other Assets 113 Note 33 Deposits from Customers 113 Note 34 Securities Issued 114 Note 35 Other Liabilities 115 Note 36 Restricted Funds 115 Note 37 Subordinated Loan Capital 116 Note 38 Investments in Ownership Interests 117 Other Information Note 39 Material Transactions with close associates 120 Note 40 Share Capital and Ownership Structure 121 Note 41 Activities that will be sold 123 Note 42 IFRS 9 Financial Instruments 123 Note 43 Events after the balance sheet date 125 Auditor’s Report 126 Statement by the Board of Directors 132 58

INCOME STATEMENT

Parent bank Group 2015 2016 (Figures in NOK millions) Note 2016 2015

5,399 4,868 Interest income 19 5,563 5,752 3,113 2,407 Interest costs 19 2,692 3,159 2,286 2,461 Net interest income 2,871 2,593

1,126 1,054 Commissions 20 1,511 1,605 70 68 Commission costs 20 72 78 6 5 Other operating income 20 4 5 1,062 991 Net commissions and other operating income 1,443 1,532

15 109 Dividends 110 17 530 776 Income from ownership interests 38 384 422 -173 145 Net income/losses from financial investments 21 160 -135 372 1,030 Net income from financial investments 654 304

3,720 4,482 Total net income 4,968 4,429

669 854 Personnel costs 22 1,166 945 709 680 Other operating costs 23 866 918 1,378 1,534 Total operating costs before impairment losses on loans 2,032 1,863

2,342 2,948 Operating profit before impairment losses on loans 2,936 2,566

380 684 Impairment losses on loans and guarantees 11 778 420 1,962 2,264 Pre-tax profit 2,158 2,146

340 343 Taxes 25 403 400 1,622 1,921 Net profit for the year 1,755 1,746

Statement of Comprehensive Income 187 -62 Actuarial gains/losses on pensions -62 200 -46 15 Tax effect of actuarial gains/losses on pensions 15 -50 141 -47 Total items not reclassified through profit or loss -47 150 -21 - Tax change actuarial gains/losses - -21 95 -62 Change in value of financial assets available for sale -62 95 - - Share of comprehensive income in associated companies and joint ventures -7 32 74 -62 Total items that can be reclassified through profit or loss -69 106 215 -109 Year's comprehensive income -116 256 1,837 1,812 Total comprehensive income 1,639 2,002

Earnings per share 6.34 7.51 Earnings per share 6.87 6.83 6.34 7.51 Diluted earnings per share 6.86 6.82

0.91 1.09 Net profit as a % of average total assets 0.90 0.96 59

BALANCE SHEET

Parent bank Group 2015 2016 (Figures in NOK millions) Note 2016 2015 Assets 931 1,079 Cash and receivables from the central bank 36 1,079 931 8,813 10,138 Loans to and receivables from financial institutions 7 4,334 2,984 137,506 120,252 Loans to customers 8,10,12,14 156,372 154,357 20,314 22,042 Certificates and bonds 14, 27 21,024 19,533 6,133 5,057 Financial derivatives 28 4,315 6,135 300 433 Equities, units and other equity interests 29 596 441 168 22 Operations that will be sold 41 22 168 3,172 2,884 Investments in ownership interests 38 4,460 4,792 2,698 3,713 Investments in group companies 38 - - 2 - Intangible assets 30 89 61 342 354 Tangible fixed assets 31 495 404 1,963 344 Other assets 32 622 2,243 182,342 166,318 Total assets 193,408 192,049

Liabilities 5,052 3,231 Debt to financial institutions 7 2,674 4,343 89,632 86,184 Deposits from customers 33 85,914 89,444 63,338 52,987 Securities issued 34 79,183 71,979 3,832 2,711 Financial derivatives 28 2,515 3,739 544 621 Payable tax 25 681 637 643 315 Deferred tax liabilities 25 360 654 708 1,063 Other liabilities 35, 24 1,147 880 3,459 2,646 Subordinated loan capital 37 2,646 3,459 167,208 149,758 Total liabilities 175,120 175,135

Equity 6,394 6,394 Share capital 40 6,394 6,394 1,587 1,587 Share premium reserve 1,587 1,587 384 575 Allocated dividend 575 384 163 52 Fund for unrealised gains 52 163 6,606 7,952 Other equity 9,680 8,386 15,134 16,560 Total equity 18,288 16,914 182,342 166,318 Total liabilities and equity 193,408 192,049

Stavanger, 8 March 2017

Dag Mejdell Chair of the board Kate Henriksen Tor Dahle

Birthe Cecilie Lepsøe Jorunn Johanne Sætre Odd Torland

Sally Lund-Andersen Kristian Kristensen Arne Austreid Employee representative Employee representative Chief Executive Officer 60

STATEMENT OF CHANGES IN EQUITY (Figures in NOK millions)

Share Fund for premium Other unrealised Total Parent bank Share capital reserve equity gains equity Equity as at 31 Dec 2014 6,394 1,587 5,757 59 13,797

Net profit for the year 1,613 9 1,622 Actuarial gains/losses after tax on pension schemes 120 120 Change in value of financial assets available for sale 95 95 Year's comprehensive income 1,733 104 1,837 Dividend from 2014, finally resolved in 2015 -512 -512 Trade in treasury shares 12 12 Transactions with shareholders -500 -500 Equity as at 31 Dec 2015 6,394 1,587 6,990 163 15,134

Net profit for the year 2,032 -111 1,921 Actuarial gains/losses after tax on pension schemes -47 -47 Change in value of financial assets available for sale -62 -62 Year's comprehensive income 1,923 -111 1,812 Dividend from 2015, finally resolved in 2016 -384 -384 Trade in treasury shares -2 -2 Transactions with shareholders -386 -386 Equity as at 31 Dec 2016 6,394 1,587 8,527 52 16,560

Group Equity as at 31 Dec 2014 6,394 1,587 7,363 59 15,403

Net profit for the year 1,737 9 1,746 Actuarial gains/losses after tax on pension schemes 129 129 Change in value of financial assets available for sale 95 95 Share of comprehensive income from associated companies 32 32 Year's comprehensive income 1,898 104 2,002 Corrected equity in associated companies 9 9 Dividend from 2014, finally resolved in 2015 -512 -512 Trade in treasury shares 12 12 Transactions with shareholders -500 -500 Equity as at 31 Dec 2015 6,394 1,587 8,770 163 16,914

Net profit for the year 1,866 -111 1,755 Actuarial gains/losses after tax on pension schemes -47 -47 Change in value of financial assets available for sale -62 -62 Share of comprehensive income from associated companies -7 -7 Year's comprehensive income 1,750 -111 1,639 Corrected equity in associated companies 121 121 Dividend from 2015, finally resolved in 2016 -384 -384 Trade in treasury shares -2 -2 Transactions with shareholders -386 -386 Equity as at 31 Dec 2016 6,394 1,587 10,255 52 18,288 61

STATEMENT OF CASH FLOW (Figures in NOK millions)

Parent bank Group 2015 2016 Note 2016 2015 -3,466 16,959 Change in loans to customers 8 -2,448 -13,522 4,834 4,256 Interest receipts from loans to customers 5,095 5,329 7,909 -3,448 Change in deposits from customers 33 -3,530 7,955 -1,355 -839 Interest payments on deposits from customers -835 -1,350 -1,795 -1,963 Change in receivables and deposits with financial institutions 7 -1,837 -1,702 -381 -491 Interest on receivables and debt to financial institutions -629 -505 -5,066 -1,728 Change in certificates and bonds 27 -1,510 -4,272 384 443 Interest receipts from certificates and bonds 422 384 1,025 991 Commission receipts 1,445 1,533 -12 60 Capital gains from sale of trading 59 -15 -1,323 -1,495 Payments for operations -1,990 -1,847 -102 -544 Paid tax 25 -637 -206 2,407 -481 Other accruals 369 2,883 3,059 11,720 A Net change in liquidity from operations -6,026 -5,335

-129 -85 Investments in tangible fixed assets 31 -167 -208 - - Receipts from sale of tangible fixed assets 31 - 6 -1,381 -1,090 Long-term investments in equities -168 -1,406 221 368 Receipts from sales of long-term investments in equities 376 221 545 886 Dividends from long-term investments in equities 681 546 -744 79 B Net change in liquidity from investments 722 -841

4,328 8,395 Increase in securities issued 34 29,255 12,861 -7,332 -15,813 Repayment – securities issued -19,332 -7,332 -1,018 -835 Interest payments on securities issued -1,075 -1,070 481 - Borrowing and sale of own subordinated loans 37 - 481 - -746 Repayments - subordinated loans 37 -746 - -137 -132 Interest payments on subordinated loans -132 -137 -512 -384 Dividend to shareholders -384 -512 -4,190 -9,515 C Net change in liquidity from financing 7,586 4,291

-1,875 2,284 A+B+C Net change in cash and cash equivalents in the year 2,282 -1,885

2,984 1,109 Cash and cash equivalents 1 Jan 1,111 2,996 1,109 3,393 Cash and cash equivalents 31 Dec 3,393 1,111

Specification of cash and cash equivalents 931 1,079 Cash and receivables from the central bank 1,079 931 178 2,314 Receivables from financial institutions at call 2,314 180 1,109 3,393 Cash and cash equivalents 31 Dec 3,393 1,111

Cash and cash equivalents include cash and deposits in the central bank, and that part of total loans to and deposits in financial institutions that relate to pure placements in financial institutions. The statement of cash flow shows how the parent bank and group generated liquid assets and how these were applied.

In total, the group's cash and cash equivalents increased by NOK 2,282 million in 2016. 62

NOTE 1 GENERAL INFORMATION NOTE 2 ACCOUNTING POLICIES The SpareBank 1 SR-Bank Group consists of the parent bank, BASIS FOR PREPARATION OF THE ANNUAL FINAN- SpareBank 1 SR-Bank ASA ('the bank'), and subsidiaries: CIAL STATEMENTS SR-Boligkreditt AS, SpareBank 1 SR-Finans AS, The bank's financial statements and the consolidated financial EiendomsMegler 1 SR-Eiendom AS, SR-Investering AS, statements for 2016 for SpareBank 1 SR-Bank ('the group') have SpareBank 1 Regnskapshuset SR AS, SR-Forvaltning AS, been prepared in accordance with International Finance Reporting Finansparken Bjergsted AS, and Rygir Industrier AS with subsidiaries Standards (IFRS) as adopted by the EU. This includes interpretations (repossessed assets). from the IFRS Interpretations Committee and its predecessor, the Standing Interpretations Committee (SIC). As at 31 December 2016, the bank owns a 13.9% stake in SpareBank 1 Boligkreditt AS, a 21.9% stake in The annual financial statements of SpareBank 1 SR-Bank for 2016 SpareBank 1 Næringskreditt AS, a 23.5% stake in BN Bank ASA, have been prepared in accordance with the IFRS regulations for a 17.9% stake in SpareBank 1 Kredittkort AS, and a 19.7% stake in parent banks and groups. SpareBank 1 Mobilbetaling AS. The group treats these as associated companies. SpareBank 1 SR-Bank is a public limited company registered as based in Norway with its head office in Stavanger. The bank also owns a stake of 19.5% in SpareBank 1 Gruppen AS and SpareBank 1 SR-Bank is listed on the Oslo Stock Exchange. a stake of 17.7% in SpareBank 1 Banksamarbeidet DA. These stakes are treated as joint ventures. The basis for measurement used in both the bank's and the consolidated financial statements is acquisition cost, with the SpareBank 1 SR-Bank, SpareBank 1 SMN, following modifications: financial derivatives, parts of financial assets, SpareBank 1 Nord-Norge and Samarbeidende Sparebanker AS and parts of financial liabilities are recognised at fair value with value each own 19.5% of SpareBank 1 Gruppen AS. The other owners are changes through profit or loss. Sparebanken Hedmark (11.0%) and the Norwegian Confederation of Trade Unions (LO) (9.6%), and SpareBank 1 Oslo Akershus (1.4%). Preparing financial statements in accordance with IFRS requires The SpareBank 1 Alliance's management structure is regulated the use of estimates. Furthermore, applying international reporting by an agreement between the owners. SpareBank 1 SR-Bank standards requires management to use its judgement. Areas that and SpareBank 1 Nord-Norge each own 23.5% of BN Bank ASA. involve a great deal of discretionary estimates, a high degree of SpareBank 1 SMN owns 33.0% and Samarbeidende Sparebanker AS complexity, or areas where assumptions and estimates are significant owns 20.0%. BN Bank ASA's management structure is regulated by an for the bank's and the consolidated financial statements are agreement between the owners. described in note 3.

The bank's head office is in Stavanger and it has 36 branches in The annual financial statements are presented in accordance Rogaland, Vest-Agder, Aust-Agder and Hordaland. Some of the with IFRS and interpretations that are obligatory for annual financial branches share premises with EiendomsMegler 1 SR-Eiendom AS. statements presented as at 31 December 2016. The annual financial All of the subsidiaries have their head offices in Stavanger. statements have been prepared on the assumption that the group is a going concern. The group's primary activities are selling and procuring a wide range of financial products and services, investments services, accounting New and revised standards that were applied in 2016: services, and leasing and estate agency. No new standards, amendments to standards or interpretations that materially affected the accounts of the group or parent company The consolidated financial statements were approved by the board were adopted from 1 January 2016. on 8 March 2017. The annual general meeting is the bank's supreme authority. New standards and interpretations that have not been adopted yet: A number of new standards, amendments to standards and interpre- tations will be compulsory in future annual financial statements. The most of important of these, which the group has chosen not to apply early, are described below:

IFRS 9 replaces the classification and measurement models in IAS 39 Financial Instrument: Recognition and measurement with one simple model, which basically only has two categories: amortised cost and fair value. The classification of loans depends on the unit's business 63

(Note 2 cont.) model for managing its financial assets and the attributes of the Presentation currency individual asset's cash flows. The presentation currency is the Norwegian krone (NOK), which is also the group's presentation currency. The functional currency in Note 42 provides a more exhaustive account of the assessments the parent company and all important subsidiaries is the Norwegian regarding IFRS 9. krone (NOK). All figures are in NOK millions unless otherwise stated.

IFRS 15 Revenue from Contracts with Customers deals with Subsidiaries recognising revenue. This will replace IAS 18 which applies to Subsidiaries' assets are valued using the cost method of accounting contracts for goods and services and IAS 11 which applies to in the bank's financial statements. Investments are assessed at the construction contracts. The new standard is based on the principle acquisition cost of the shares assuming that no write-downs have that income recognition takes place when control over a good or been necessary. service is transferred to a customer – so the principle of control will replace the existing principle of risk and return. Dividends, group contributions and other distributions are recognised as income in the year that they are approved by the The group is currently assessing the effects of IFRS 15. annual general meeting. If the dividend/group contribution exceeds the share of the retained profit after the acquisition, the amount in IFRS 16 Leases will primarily affect the lessee's accounting and will excess represents a repayment on invested capital, but is, pursuant to result in almost all leases being capitalised. The standard eliminates the amended IAS 27, recognised as income in the year that it is paid. the current distinction between operational and financial leases and requires recognition of a right of use asset (the right to use this Consolidation leased asset) and a financial liability to pay the lease for almost all The consolidated financial statements include all subsidiaries. leases. Exemptions exist for short-term leases and low value leases. Subsidiaries are all units (including structured units) over which The income statement will also be affected because the total cost is the group has control. Control over a unit arises when the group usually higher in the first few years of a lease and lower in later years. experiences variation in the return from the unit and has the ability to Operating costs will also be replaced with interest and depreciation, influence this return because of its power over the unit. Subsidiaries so important ratios will change. are consolidated from the day control arises and deconsolidated Cash flows from operations will increase because payment of the when control ceases. principal of the lease liability will be classified as a financing activity. Only that part of payments that are interest can be presented as cash The acquisition method is used for acquisitions of business. flow from operations. The remuneration paid is measured at the fair value of the assets The lessor's accounting will not be materially changed. Some transferred, liabilities assumed and equity instruments issued. The differences may arise as a consequence of new guidelines on the fair value of all assets or liabilities according to the agreement on definition of a lease. Under IFRS 16, a contract is a lease, or contains conditional consideration are also included in the remuneration. a contract, if it transfers the right to control the use of an identified Identifiable assets, liabilities and contingent liabilities are recognised asset for a period of time in exchange for remuneration. at their fair value on the acquisition date. Minority interests in the The group is currently assessing the effects of IFRS 16. acquired business are measured from time to time at either fair value or their share of the net assets of the acquired business. Disclosure Initiative – amendments in IAS 7. Going forward an enterprise will have to explain changes in its liabilities due to finan- Costs linked to the acquisition are recognised as costs when they are cing activities. This includes changes due to cash flows (e.g. drawing incurred. and repaying loans) and changes without cash flow effects, such as acquisitions, sales, calculated interest, and unrealised currency diffe- When an acquisition occurs in multiple steps, the assets from rences. Changes in financial assets must be included in explanatory previous acquisitions must be revalued at fair value on the date the information if the cash flows were, or will be, included in cash flows check is made and the change in value recognised. from financing activities. This could, for example, be the case for assets that hedge financing liabilities. Enterprises can include other Conditional consideration is measured at fair value on the acquisition changes in this information, for example by showing a reconcilia- date. The treatment of subsequent changes in the fair value of tion of net liabilities. In these circumstances changes in the other conditional consideration depends on whether the conditional elements will be presented separately from changes in liabilities due consideration is classified as an asset, liability or equity. Assets and to financing activities. The information can be presented as a table liabilities that are not financial assets or liabilities (i.e. outside the that reconciles ingoing and outgoing balances, although no specific scope of IAS 39) are measured at fair value with value changes format is required. presented through profit or loss. Financial assets or liabilities are measured at fair value and changes in value must, in accordance There are no other standards or interpretations which are not with IAS 39, be recognised or presented in other comprehensive currently in effect and would be expected to have a material effect income. No new measurement is made of conditional consideration on the consolidated financial statements. that is classified as equity and subsequent settlements are recognised against equity. 64

(Note 2 cont.)

Intra-group transactions, intra-company balances and unrealised Joint arrangements profit between group companies are eliminated. The group has adopted IFRS 11 for all joint arrangements. Under IFRS Unrealised losses are also eliminated. Reported figures from 11, investments in joint arrangements must be classified as either subsidiaries are, if necessary, restated so they correspond with the a joint operation or a joint venture, depending on the contractual group's accounting policies. rights and obligations of each investor. SpareBank 1 SR-Bank has assessed its joint arrangements and determined that they are joint The minority interests' share of the group's profit is presented on a ventures. Joint ventures are recognised using the equity method in separate line under net profit in the income statement. Their share of the group and the cost method in the financial statements. the minority's equity is shown as a separate item. When the equity method is used joint ventures are recognised at Change in ownership interests in subsidiaries without their original acquisition cost. The carrying amount is thereafter any loss of control adjusted to recognise the share of the results after the acquisition Transactions with minority interests (non-controlling owners) in and the share of comprehensive income. When the group's share subsidiaries that do not entail any loss of control are treated as equity of a loss in a joint venture exceeds the carrying amount (including transactions. In the event of further acquisitions, the difference other long-term investments that in reality are part of the group's between the remuneration and the shares' proportional share of the net investment in the venture) no further loss is recognised, unless carrying amount for net assets in the subsidiary is recognised against liabilities have been assumed or payments made on behalf of the the equity of the parent company's owners. Gains or losses from joint venture. sales to minority interests are similarly recognised against equity. Unrealised gains from transactions between the group and its joint Disposal of subsidiaries ventures are eliminated in relation to the ownership interest in the In the event of a loss of control, any remaining ownership interest venture. Unrealised losses are also eliminated unless the transaction is measured at fair value with changes recognised through profit or provides evidence of a fall in the value of the transferred asset. loss. Amounts reported from joint ventures are, if necessary, restated to Fair value will thereafter constitute the acquisition cost for further ensure they correspond with the group's accounting policies. accounting, as an investment in an associated company, joint ven- ture or financial asset. Amounts that were previously recognised in Lending and impairment losses on loans other comprehensive income relating to this company are treated as Loans with variable rates are measured at amortised cost in if the group had disposed of the underlying assets and liabilities. This accordance with IAS 39. The amortised cost is the acquisition cost could entail amounts that have previously been recognised in other minus repayments on the principal, taking into account transaction comprehensive income being reclassified to the income statement. costs, plus or minus cumulative amortisation using the effective interest method, and less any amount for impairment in value Associated companies or exposure to loss. The effective interest rate is the interest that Associated companies are entities in which the group has a exactly discounts estimated future cash receipts and payments significant interest but not control. Normally, significant influence over the expected life of the financial instrument. arises when the group has a stake of between 20% and 50% of the voting capital. Investments in associated companies are recorded Fixed-rate loans to customers are earmarked upon initial recognition in accordance with the cost method of accounting in the bank's at fair value, with value changes through profit or loss, in accordance financial statements and the equity method in the consolidated with IAS 39.9. Gains and losses resulting from changes in fair value financial statements. are recorded through profit or loss as a change in value. Accrued interest and premiums/discounts are recorded as interest. The bank New investments are recorded at acquisition cost in consolidated uses the fair value option for measuring fixed-rate loans, as this financial statements. Investments in associated companies include largely eliminates inconsistencies in measuring other comparable goodwill/badwill identified at the time of the acquisition, reduced by instruments in the balance sheet. any possible later write-downs. Sales of loans The group's share of profits or losses in associated companies are The bank has concluded an agreement concerning the sale recorded and added to the book value of the investments. The of loans with good security and collateral in real estate to group's share of the comprehensive income in the associated SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt AS. In company is recognised in other comprehensive income in the group line with the administration contract between the bank and financial and is also supplemented with the carrying amount for the invest- institutions, the bank administers the loans and maintains the contact ments. The group does not recognise the share of any loss if this with customers. The bank receives a fee in the form of commissions makes the carrying amount of the investment negative (including for the duties involved in administering the loans. The agreements unsecured receivables from the unit), unless the group has assumed between the bank and SpareBank 1 Boligkreditt AS and obligations or made payments on behalf of the associated company. SpareBank 1 Næringskreditt AS were amended in 2015 with effect for new and previously transferred loans. The new agreements mean that the bank has transferred practically all of the risk and benefits of 65

(Note 2 cont.) ownership associated with the sold loans. The sales are therefore with respect to impairment, and where an impairment is identified or treated as pure sales and loans are thus fully eliminated from the continues to be identified, are not included in a general assessment bank's balance sheet. of impairment. See note 3. This is described in note 9. If there is objective evidence that impairment has occurred, the The bank has concluded an agreement concerning the sale of loans amount of the loss is calculated as the difference between the asset's with good security and collateral in real estate to SR-Boligkreditt book (carrying) value and the present value of estimated future cash AS. In line with the administration contract between the bank and flows (excluding future credit losses that have not been incurred) mortgage companies, the bank administers the loans and maintains discounted at the financial asset's latest effective interest rate. The the contact with customers. The bank receives a fee in the form of book value of the asset is reduced using an allowance account and commissions for the duties involved in administering the loans. the loss is recorded in the income statement.

Assessment of impairment of financial assets Future cash flows from a group of financial assets that are tested for On each balance sheet date, the group assesses whether there is any impairment on a portfolio basis are estimated on the basis of the objective evidence that the cash flow expected when the item was contractual cash flows for the group and historical losses on assets initially recorded will not be realised and that the value of the financi- with a similar credit risk. Historical losses are adjusted for existing al asset or group of financial assets has been reduced. An impairment observable data in order to take into account the effects of existing in value of a financial asset assessed at amortised cost or group of circumstances that were not present at the time of the historical financial assets assessed at amortised cost has been incurred if, and losses and to adjust for the effect of earlier circumstances that do only if, there is objective evidence of impairment that could result not exist today. in a reduction in future cash flows to service the commitment. The impairment must be the result of one or more events that have Non-performing and loss exposed commitments occurred after the initial recognition (a loss event) and it must be The total commitment to a customer is considered to be in de- possible to measure the result of the loss event (or events) in a relia- fault (non-performing) and included in the group's summaries of ble manner. Objective evidence that the value of a financial asset or defaulted loans when an instalment or interest is not paid 90 days group of financial assets has been reduced includes observable data after due date, a line of credit is overdrawn for 90 days or more, or that is known to the group relating to the following loss events: the customer is bankrupt. Loans and other commitments that are not in default, but where the customer's financial situation makes it • The issuer or borrower is experiencing significant financial likely that the group will incur a loss, are classified as loss exposed difficulties commitments. • Breach of contract, such as a default or delinquency in payment of instalments and interest Realised losses • The bank granting the borrower special terms for financial or legal When it is highly probable that the losses are final, the losses are reasons relating to borrower's financial situation classified as realised losses. Realised losses that are covered by earlier • Likelihood of the debtor entering into debt negotiations or other specific loss provisions are recorded against the provisions. Realised financial reorganisation losses without cover by way of impairment losses on loans and over • Disappearance of an active market for the financial asset because or under coverage in relation to previous impairment losses on loans of financial difficulties are recognised through profit or loss. • Observable data indicating that there is a measurable decline in future cash flows from a group of financial assets since the initial Repossessed assets recognition of those assets, even though the decline cannot yet As part of the handling of non-performing loans and guarantees, be fully identified with the individual financial assets in the group the group acquires, in some cases, assets that have been lodged as including: security for such commitments. At the time of takeover, the assets - adverse changes in the payment status of the borrowers in the are valued at their assumed realisation value and the value of the group loan commitment is adjusted accordingly. Repossessed assets that - national or local economic conditions that correlate with are to be realised are classified as operations that will be sold, hol- defaults of the assets in the group dings or fixed assets held for sale and recorded in accordance with the relevant IFRS standards (normally IAS 16, IAS 38, IAS 39 or IFRS 5). The group first considers whether there is individual objective evidence of impairment of financial assets that are significant Leases individually. For financial assets that are not individually significant, Financial leases are recorded in the balance sheet under the main the objective evidence of impairment is considered individually or item 'Net lending to customers' and recognised in accordance with collectively. If the group decides that there is no objective evidence the amortised cost principle. All fixed income during the expected of impairment of an individually assessed financial asset, significant term of the lease is included when calculating the lease's effective or not, the asset is included in a portfolio of financial assets with interest. the same credit risk characteristics. The group is tested for any impairment on a portfolio basis. Assets that are assessed individually The group has no sale and lease back contracts covering property, plant and equipment. 66

(Note 2 cont.) Securities Tangible fixed assets Securities comprise equities and units, certificates and bonds. Tangible fixed assets comprise buildings, plots of land and operating Equities and units are recognised either as held for sale or at fair equipment. Buildings and operating equipment are recognised at value with change in value through profit or loss. Certificates and cost less depreciation and write-downs. Plots of land are recorded bonds are classified either as held for sale, at fair value with value at cost price less write-downs. Plots of land are not depreciated. The change through profit or loss, as held to maturity or as a receivable. cost price includes all direct costs related to the acquisition of the The group uses the price on the trade date upon initial recognition asset. of securities. Depreciation is on a straight-line basis in order to allocate the cost price, less possible residual value, over the useful life of the operating All financial instruments that are classified as held for sale or at fair equipment. value with value change through profit or loss, are measured at fair value, and changes in the value from the opening balance are recor- Operations/assets that will be sold ded as income from financial investments. The group is of the opini- These items on the balance sheet contain the group's assets it has on that financial instruments classified at fair value with value change decided to sell. The items include assets and liabilities relating to through profit or loss provide more relevant information about the repossessed properties and property companies that are to be values of these items in the balance sheet than if they were assessed syndicated and disposed of by selling parts to customers. The at amortised cost. The financial instruments included in this category items are recognised at fair value. are regularly reported and managed based on fair value. Certificates and bonds that are classified as held to maturity or as a Funding receivable are measured at amortised cost using an effective interest Funding is initially recorded at the cost at which it is raised, which is rate method. See description of this method in the section on fair value of the proceeds received after deducting transaction costs. lending. Loans raised with variable rates are thereafter measured at amortised cost, and any discount/premium is accrued over the term of the Derivatives and hedging loan. Fixed-rate funding is assessed at fair value with discounting Derivatives consist of currency and interest rate instruments. according to the applicable interest curve, though not taking into Derivatives are recognised at fair value through profit or loss. The account changes in own credit spreads and transaction costs, since fair value of derivatives includes the value of counterparty credit risk the group use fair value hedging for such funding. Deposits from (CVA). customers and financial institutions are assessed at amortised cost.

The group uses derivatives for operational and accounting (funding) Pensions hedging purposes to minimise the interest rate risk in fixed-rate The SpareBank 1 SR-Bank Group has two types of pension scheme: instruments (fixed-rate funding and fixed-rate loans), bonds (assets defined benefit and defined contribution benefit. The group has and liabilities), and certificates (assets and liabilities). The efficiency of both covered and uncovered defined benefit pension schemes. the hedging is assessed and documented both when the initial clas- The covered defined benefit pension scheme was, until sification is made and on an ongoing basis. When fair value hedging 31 December 2015, covered by the group's pension fund. is used the hedging instrument is recognised at fair value, but as far In addition to the pension liabilities covered by the pension fund, as the hedged item is concerned changes in fair value linked to the the group has uncovered pension liabilities that cannot be covered hedged risk are recognised through profit and loss and against the by the assets in the collective schemes. hedged item. See note 28 for further information. The group's covered defined benefit pension scheme was closed to Goodwill/badwill new members from and including 1 April 2011. A decision was also Goodwill is the positive difference between the cost of acquiring a taken at the board meeting in June 2015 that employees who are business and the fair value of the Bank's share of the net identifiable still members of the defined benefit pension scheme must transfer assets in the business at the time of acquisition. Goodwill on the to a defined contribution pension scheme from 1 January 2016. acquisition of subsidiaries is classified as intangible assets. Goodwill on the acquisition of shares in associated companies and joint Defined benefit schemes ventures is included in the investment and tested for depreciation as A defined benefit scheme is defined as a scheme that is not a defined part of the book (carrying) value of the investment. Goodwill is not contribution scheme. subject to amortisation, but is subject to annual impairment testing with the purpose of identifying any indications that impairment may A defined benefit scheme will typically define an amount an have occurred, in accordance with IAS 36. Any assessment of a fall in employee will receive from and including the date of retirement, value is assessed at the lowest level in the undertaking where good- usually dependent of age, number of years worked and pay. will is followed up for internal management purposes. Write-downs of goodwill cannot be reversed. In those cases where the cost of The liability that must be recognised for the defined benefit scheme acquiring a business is lower than the fair value of the bank's share is the present value of the liability on the balance sheet date, with of net identifiable assets at the time of acquisition, so-called badwill, deductions for the fair value of the pension assets. The gross liability the difference is immediately recorded as income and included in is calculated by an independent actuary using the unit credit met- income from ownership interests. hod. The gross liability is discounted to the present value using the interest rate on high quality corporate bonds with almost the same term to maturity as the payment horizon of the liability. 67

(Note 2 cont.)

Gains and losses that occur with the recalculation of the liability Interest income and interest costs due to experience gains and losses, and changes in actuarial Interest income and interest costs related to assets and liabilities assumptions, are recognised against equity via the comprehensive that are measured at amortised cost are recorded continuously in income statement in the period they arise. The effects of changes in the income statement in accordance with the effective interest rate the schemes' plans are recognised immediately. method. The effective interest rate is the interest rate that results in the present value of the expected cash flow over the expected life Defined contribution scheme of a financial asset or liability being equal to the book value (carrying In the case of defined contribution plans, the company pays a fixed value) of the respective financial asset or liability. contribution to an insurance company. The company has no legal When calculating an effective interest rate, the cash flow effect or self-imposed obligation to inject further assets if there proves to inherent in the agreement is estimated, without taking into account be insufficient assets to pay all employees the benefits linked to their future impairment. The calculations take therefore into account inter earnings in this or earlier periods. The subscriptions are recorded alia fees, transaction costs, premiums and discounts. as a payroll cost. Any pre-paid subscription is recorded as an asset (pension asset) to the extent that the subscription can be refunded or If a financial asset is written down due to impairment, a new effective reduces future subscription payments. interest rate is calculated based on adjusted estimated cash flows.

Contingent liabilities Interest income and costs for financial instruments measured at fair The group issues financial guarantees as part of its ordinary business. value are classified as interest income and interest costs respectively. Gross latent liabilities are specified in note 35. Impairment assess- Other changes in value are classified as income from financial ments are made as part of assessing impairment losses on loans and instruments. in accordance with the same policies, and are reported with these, ref. note 11. Provisions are made for other uncertain liabilities if it Commissions and commission costs is more probable than not that the liability will materialise and the Commissions and commission costs are generally accrued in line financial consequences can be reliably calculated. Information is with the delivery/receipt of a service. Fees relating to interest-bearing disclosed about contingent liabilities that do not satisfy the criteria instruments are not recognised as commissions, but are included in for balance sheet recording if they are significant. the calculation of the effective interest rate and recognised accor- dingly through profit or loss. Advisory/consultancy fees are accrued Provisions are made for restructuring costs when the group has a in accordance with the signed agreement, typically at the time the contractual or legal obligation, payment is probable and the amount service is delivered. can be estimated, and the size of the obligation can be estimated with sufficient reliability. The same applies to day-to-day management services. Fees and charges related to the sale or brokerage of financial instruments, Subordinated loans and hybrid tier 1 capital properties or other investment objects that do not generate balance Subordinated loans have a lower priority than all other debt. sheet items in the consolidated financial statements, are recognised 50% of the dated subordinated loans can be regarded as tier 1 capital when the transaction is completed. in the capital ratio, whilst 100% of perpetual subordinated loans can be included in tier 1 capital. Subordinated loans are classified as Transactions and balance sheet items in foreign subordinated loan capital in the balance sheet and are measured at currency fair value with value change through profit or loss or amortised cost Transactions involving foreign currencies are converted into in the same way as other long-term loans. The bank uses fair value Norwegian krone using the exchange rates at the time of the hedging for measuring fixed-rate loans. transactions. Gains and losses linked to executed transactions, or to the conversion of holdings of balance sheet items, in foreign Hybrid tier 1 capital are bonds with nominal interest, but the group currency are recognised on the balance sheet date. Gains and losses is not obliged to pay any interest in periods when no dividend is on non-monetary items are included in the income statement paid and the investor cannot later claim any interest that has not in the same way as the corresponding balance sheet item. been paid, i.e. interest is not accumulated. Tier 1 capital instruments The exchange rate on the balance sheet date is used when have been approved as an element of tier 1 capital. The Financial converting balance sheet items. Supervisory Authority of Norway can demand that hybrid instru- ments be written down proportionally with equity if the bank's tier Taxes 1 capital ratio falls below 5%, or the capital ratio falls below 8%. The Taxes consist of payable tax and deferred tax. Payable tax is the written down amount relating to the hybrid tier 1 capital shall be estimated tax on the year's taxable profit. written up before dividends can be disbursed to shareholders. Hybrid tier 1 capital is classified as subordinated loan capital in the balance Payable tax for the period is calculated according to the tax laws and sheet and is measured at fair value with changes in value through regulations enacted or substantively enacted on the balance sheet profit or loss. date.

Dividends Dividends are recognised as equity in the period prior to being approved by the bank's annual general meeting. 68

(Note 2 cont.)

Deferred taxes are accounted for using the liability method in and returns that are different from other geographic markets. As accordance with IAS 12. Deferred tax assets or liabilities are calcula- regards segment reporting, the group executive management team ted based on all the temporary differences, which are the differences is considered to be supreme decision-making authority. The figures between the book values of assets and liabilities for accounting in the segment reporting are based on internal reporting to group purposes and for taxation purposes. Nonetheless, no deferred tax executive management team. liability or benefit is calculated on goodwill that does not provide tax-related deductions, or on initially recognised items that affect Events after the balance sheet date either the accounting or taxable result. The financial statements are published after the board has approved them. The general meeting and the regulatory authorities may refuse Deferred tax assets are calculated for tax loss carry forwards. Assets to approve the published financial statements subsequent to this but with deferred tax are included only to the extent that future taxable they cannot change them. profits are expected to make it possible to exploit the related tax Events that take place before the date on which the financial state- benefit. ments are approved for publication, and which affect conditions that were already known on the balance sheet date, will be incorporated Cash flow statement into the pool of information that is used when making accounting The statement of cash flow shows cash flows grouped by source estimates and are thereby fully reflected in the financial statements. and application area. Cash is defined as cash, deposits in central Events that were not known on the balance sheet date will be repor- banks, and deposits in financial institutions with no period of notice. ted if they are significant. The statement of cash flow is prepared using the direct method. The financial statements have been prepared on the basis of a going Segment reporting concern assumption. A business segment is part of an entity that is engaged in providing individual products or services that are subject to risks and returns The board's proposed dividend is specified in the board of directors' that are different from those of other business segments. A geograp- report and note 43. The proposed divided is classified as equity until hic market (segment) is a part of a business that supplies products it has finally been approved. and services within a limited geographic area that is subject to risks 69

NOTE 3 CRITICAL ESTIMATES AND JUDGEMENTS CONCERNING USE OF THE ACCOUNTING POLICIES

IMPAIRMENT LOSSES ON LOANS AND GUARANTEES FAIR VALUE OF EQUITY INTERESTS The group assesses its entire corporate market portfolio annually. Financial assets assessed at fair value through profit or loss will Large commitments, non-performing loans and high-risk exposures normally be traded in active markets and the fair value can thus be are subject to quarterly assessments. Loans to retail customers are determined with reasonable certainty. Market values for assets and subject to evaluation when they are in default for more than 60 days. liabilities that are recognised at amortised cost and appear in notes Large non-performing loans are evaluated on a quarterly basis. may be estimates based on discounted expected future cash flows, multiplier analyses or other calculation methods. Such methods can The group's risk classification systems are described under financial be subject to significant uncertainty. With the exception of a few risk management. equities, liquidity in the Norwegian stock market is poor. Share prices will under most circumstances be the last known traded price. The group makes write-downs if there is objective evidence that can be identified for an individual commitment, and the objective FAIR VALUE OF DERIVATIVES evidence entails a reduction in future cash flows for servicing the The fair value of derivatives is usually determined by using valuation commitment. Objective evidence may be default, bankruptcy, methods where the price of the underlying object, for example, insolvency or other significant financial difficulties. interest and currency rates, is obtained from the market. In the case of options, volatility will be either observed implicit volatility Individual write-downs are calculated as the difference between or calculated volatility based on historical price movements for the the loan's book (carrying) value and the present value of future underlying object. cash flows based on the effective interest rate at the time of the calculation of the initial individual write-down. Subsequent changes PENSIONS in interest rates are taken into account for loan agreements with Net pension liabilities and the pension costs for the year are based variable rates if these changes affect the expected cash flow. on a number of estimates, the most important of which are the yield on pension assets, future interest and inflation rates, future Collective write-downs are calculated on groups of loans where wage development, staff turnover, development in the Norwegian there is objective evidence indicating that a loss event has occurred National Insurance basic amount (G) and the general development after the initial recording of the loans. Objective evidence includes in the number of persons receiving disability benefits and life expe- observable data that results in a measurable reduction in estimated ctancy. Uncertainty is largely related to gross liabilities and not to net future cash flows from the group of loans, including negative liabilities that are shown in the balance sheet. Changes in estimates changes in the payment status of debtors in the groups of loans, or because of changes in the above parameters will be recorded via national or local economic conditions that correlate with default in other comprehensive income on an ongoing basis. the group of loans. If objective evidence of a fall in value exists, loan losses shall be calculated as the difference between the carrying INCOME TAX amount (book value) and the present value of the estimated future When calculating the group's income tax, a considerable degree of cash flows, discounted at the effective interest rate. discretion is called for. There will be some uncertainty associated with the final tax liability with regard to many transactions and cal- culations. The group records tax liabilities linked to future decisions in tax cases and disputes based on the additional tax liability that will accrue. If the final outcome of a case differs from the amount origi- nally allocated, the difference will affect the recorded tax costs and allocations for deferred tax in the period the difference is established. 70

NOTE 4 SEGMENT REPORTING The executive management team has assessed which segments are reportable based on the form of distribution, products and customers. The primary reporting format is based on the risk and return profile of the assets, and it is divided between the retail market (including self- employed people), the corporate market, capital market and subsidiaries of significant importance. Own account trading/staff/support parent bank covers administration, management, investment services, strategy and ownership, treasury and financial functions in the bank. SR-Boligkreditt AS was established in the second quarter of 2015. The activities in SR-Boligkreditt AS are divided between the retail market and own account trading/ staff/support in the parent bank segments. Commissions from SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt are reported under "Net commissions and other income".

Reporting per business area: (Figures in NOK millions) Own account trading/ Retail Corporate Capital staff/ Eiendoms­- Other Elimin- SR-Bank 2016 market market market support Megler 1 SR-Finans business ations Group Interest income 1,645 1,760 30 1,941 2 359 3 -177 5,563 Interest costs 462 452 -16 1,848 - 119 - -173 2,692 Net interest income 1) 1,183 1,308 46 93 2 240 3 -4 2,871 Commissions 666 329 48 10 348 4 167 -61 1,511 Commission costs 37 24 4 17 - 18 30 -58 72 Other operating income - - - 5 - - - -1 4 Net commissions and other operating income 629 305 44 -2 348 -14 137 -4 1,443 Dividends 5 - 2 103 - - - - 110 Income from ownership interests - 18 - 758 - - - -392 384 Net income/losses from financial investments 5 8 37 61 - 5 -1 45 160 Net income from financial investments 10 26 39 922 - 5 -1 -347 654 Personnel costs 388 176 54 237 205 32 79 -5 1,166 Administration costs 86 27 16 283 35 7 11 -1 464 Other operating costs 97 31 11 134 94 16 22 -3 402 Total operating costs before impairment losses on loans 571 234 81 654 334 55 112 -9 2,032 Operating profit before impairment losses on loans 1,251 1,405 48 359 16 176 27 -346 2,936 Change in individual impairment losses on loans and guarantees 27 510 - - - 83 - - 620 Change in group write-downs on loans and guarantees 5 144 - - - 9 - - 158 Pre-tax profit 1,219 751 48 359 16 84 27 -346 2,158

Net interest income Net external interest income 1,183 1,308 46 -26 - 359 3 -2 2,871 Net internal interest income - - - 119 2 -119 - -2 - Net interest income 1,183 1,308 46 93 2 240 3 -4 2,871

Balance sheet Gross loans to customers 93,159 54,922 379 2,183 - 7,002 - -7 157,638 Individual impairments -60 -374 - - - -73 - -82 -590 Impairments on groups of loans -50 -550 - - - -76 - - -676 Certificates/bonds/financial derivatives - - 2,222 25,098 - - 9 -1,990 25,339 Other assets 13 958 71 18,490 148 4 789 -8,778 11,696 Total assets 93,062 54,956 2,672 45,771 148 6,857 798 -10,858 193,408

Deposits from customers 47,754 37,355 4 1,072 - - - -272 85,914 Other liabilities and equity 1) 45,308 17,601 2,668 44,699 148 6,857 798 -10,585 107,493 Total liabilities and equity 93,062 54,956 2,672 45,771 148 6,857 798 -10,858 193,408

Total loans sold to SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt 24,177 517 24,694 71

(Note 4 cont.) Own account trading/ Retail Corporate Capital staff/ Eiendoms­- Other busi- Elimin- SR-Bank 2015 market market market support Megler 1 SR-Finans ness ations Group Interest income 1,855 1,679 1,168 822 3 390 2 -167 5,752 Interest costs 775 607 1,096 710 - 136 - -164 3,159 Net interest income 1) 1,080 1,072 72 113 3 254 2 -2 2,593 Commissions 744 333 36 15 383 4 141 -49 1,605 Commission costs 38 25 5 3 - 23 33 -48 78 Other operating income 1 - - 5 - - 1 -2 5 Net commissions and other operating income 706 308 31 17 383 -19 109 -3 1,532 Dividends 3 - 1 11 - - 1 1 17 Income from ownership interests - 40 - 490 - - - -108 422 Net income/losses from financial investments 12 -91 -22 -74 - - -30 70 -135 Net income from financial investments 15 -51 -21 427 - - -29 -37 304 Personnel costs 383 179 57 49 216 24 39 -3 945 Administration costs 103 30 13 276 41 9 7 - 480 Other operating costs 101 34 10 150 99 12 35 -3 438 Total operating costs before impairment losses on loans 587 243 80 475 356 45 81 -5 1,863 Operating profit before impairment losses on loans 1,214 1,086 2 82 30 190 1 -37 2,566 Change in individual impairment losses on loans and guarantees 3 242 - - - 35 - - 280 Change in group write-downs on loans and guarantees 5 130 - - - 5 - - 140 Pre-tax profit 1,206 713 2 82 30 150 1 -36 2,146

Net interest income Net external interest income 1,080 1,072 72 -21 - 390 2 -1 2,593 Net internal interest income - - - 133 3 -136 - -1 - Net interest income 1,080 1,072 72 112 3 254 2 -2 2,593

Balance sheet Gross loans to customers 89,133 55,852 698 2,509 - 7,000 - -2 155,190 Individual impairments -66 -219 - - - -30 - - -315 Impairments on groups of loans -45 -406 - - - -67 - - -518 Certificates/bonds/financial derivatives - - 6,022 20,520 - 1 17 -892 25,668 Other assets 55 962 142 17,937 168 105 572 -7,917 12,024 Total assets 89,077 56,190 6,862 40,966 168 7,008 589 -8,811 192,049

Deposits from customers 46,910 38,359 3,699 664 - - - -188 89,444 Other liabilities and equity 1) 42,167 17,830 3,164 40,302 168 7,008 589 -8,623 102,605 Total liabilities and equity 89,077 56,190 6,862 40,966 168 7,008 589 -8,811 192,049

Total loans sold to SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt 28,168 538 28,706

1) Net interest income and other liabilities contain allocated arrangements between the segments. The interest on intercompany receivables for the retail market division and the corporate market division is determined on the basis of expected observable market interest rates (NIBOR) plus expected additional costs in connection with the group's long-term funding (credit premium). Differences between the group's actual funding costs and the interest applied on intercompany receivables are eliminated in the parent bank. 72

(Note 4 cont.)

The group primarily operates in a geographical area bounded by Grimstad in the south east and Bergen in the north west. Important asset classes (loans and deposits) are also segmented geographically in separate notes under loans and deposits.

Rogaland Agder Hordaland SR-Bank Group Geographic distribution 2016 2015 2016 2015 2016 2015 2016 2015 Net interest income 2,386 2,171 228 203 257 219 2,871 2,593 Net commissions and other operating income 1,164 1,260 126 136 153 136 1,443 1,532 Net income from financial investments 651 301 1 -3 2 6 654 304 Operating costs 1,752 1,574 127 138 153 151 2,032 1,863 Operating profit before impairment losses on loans 2,449 2,158 228 198 259 210 2,936 2,566 Impairment losses on loans and guarantees 771 388 1 5 6 27 778 420 Pre-tax profit 1,678 1,770 227 193 253 183 2,158 2,146

Gross loans to customers 127,218 125,795 15,040 14,790 15,380 14,605 157,638 155,190 Individual impairments -492 -174 -56 -85 -42 -56 -590 -315 Impairments on groups of loans -655 -502 -8 -6 -13 -10 -676 -518 Certificates/bonds/financial derivatives 25,339 25,668 - - - - 25,339 25,668 Other assets 11,691 11,991 2 14 3 19 11,696 12,024 Total assets 163,101 162,778 14,979 14,713 15,328 14,558 193,408 192,049

Deposits from customers 76,938 79,676 4,556 5,276 4,421 4,492 85,914 89,444 Other liabilities and equity 86,163 83,102 10,423 9,437 10,907 10,066 107,493 102,605 Total liabilities and equity 163,101 162,778 14,979 14,713 15,328 14,558 193,408 192,049

Total loans sold to SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt. 21,735 25,348 1,929 2,105 1,030 1,252 24,694 28,706

NOTE 5 CAPITAL ADEQUACY (Figures in NOK millions)

On 22 August 2014, the Ministry of Finance stipulated amendments to the capital requirements regulations with effect from 30 September 2014. The amendments are adjustments implemented to comply with the EU's new capital adequacy regulations for banks and securities undertakings (CRD IV/CRR) and entail the minimum requirement for common equity tier 1 capital ratio was gradually increased in the run up to 30 June 2016.

The following requirements applied as at 30 June 2016: capital conservation buffer 2.5%, systemic risk buffer 3.0%, and countercyclical buffer 1.5%. These requirements were additional to the requirement for common equity tier 1 capital of 4.5%, meaning the combined minimum requirement for common equity tier 1 capital was 11.5% from 30 June 2016. The Financial Supervisory Authority of Norway has also set an individual Pillar 2 requirement of 2.0%, which will be added to the minimum common equity tier 1 capital ratio requirement from 31 December 2016. The total minimum common equity tier 1 capital requirement will therefore be 13.5% from 31 December 2016. The countercyclical capital buffer will increase by 0.5 percentage points from 31 December 2017 and the minimum common equity tier 1 capital ratio requirement will thus increase to 14.0% from 31 December 2017.

SpareBank 1 SR-Bank has permission from the Financial Supervisory Authority of Norway to use internal measurement methods (Internal Rating Based Approach) for quantifying credit risk. The use of IRB requires the bank to comply with extensive requirements relating to organisation, expertise, risk models and risk management systems. In February 2015, SpareBank 1 SR-Bank was granted permission by the Financial Supervisory Authority of Norway to switch to Advanced IRB for the corporate portfolio, which was previously reported in accordance with Foundation IRB.

Investments in associated companies and joint ventures are recognised in the group using the equity method and in accordance with the acquisition method in the parent bank. The investments are treated identically for the purposes of determining the capital adequacy ratio except for the group's investments in SpareBank 1 Boligkreditt, SpareBank 1 Næringskreditt and BN Bank. A proportionate consolidation is carried out for the group's capital adequacy.

Parent bank Group 2015 2016 2016 2015 6,394 6,394 Share capital 6,394 6,394 1,587 1,587 Share premium reserve 1,587 1,587 384 575 Allocated dividend 575 384 163 52 Fund for unrealised gains 52 163 6,606 7,952 Other equity 9,680 8,386 15,134 16,560 Total recorded equity 18,288 16,914 73

(Note 5 cont.) Parent bank Group 2015 2016 2016 2015 Tier 1 capital -2 - Deferred tax, goodwill and other intangible assets -94 -67 -384 -575 Deduction for allocated dividend -575 -384 -380 -210 Deduction in expected losses IRB less loss provisions -263 -421 - - Deduction common equity tier 1 capital for essential investments in financial institutions -163 -191 -39 -36 Value of derivative liabilities at fair value -50 -57 14,329 15,739 Total common equity tier 1 capital 17,143 15,794 794 791 Tier 1 capital instruments 1,084 1,088 15,123 16,530 Total tier 1 capital 18,227 16,882

Tier 2 capital 2,536 1,778 Non-perpetual subordinated capital 2,276 3,111 -60 -60 Deduction for essential investments in financial institutions -60 -60 2,476 1,718 Total tier 2 capital 2,216 3,051

17,599 18,248 Net primary capital 20,443 19,933

Credit risk Basel II 14,820 17,228 SME 17,231 14,822 20,445 18,176 Specialised enterprises 19,471 22,148 6,316 6,435 Other enterprises 6,785 6,830 1,092 997 Mass market SME 1,194 1,236 20,024 15,599 Mass market - mortgage on real estate 25,899 27,170 928 1,992 Other mass market 2,027 950 7,802 10,439 Equity positions - - 71,427 70,866 Total credit and counterparty risk IRB 72,607 73,156

70 68 States and central banks 68 70 116 269 Local and regional authorities, state-owned enterprises 333 191 5,628 3,400 Institutions 2,169 5,985 2,075 3,324 Enterprises 7,446 6,886 121 546 Mass market 2,058 1,386 - - Mass market - mortgage on real estate 2,506 4,114 1,228 1,400 Covered bonds 1,817 1,205 4,600 2,938 Equity positions 4,950 4,661 1,507 824 Other assets 1,726 1,840 15,345 12,769 Total credit and counterparty risk standard method 23,073 26,338

499 415 Risk of weaker creditworthiness at counterparty (CVA) 701 1,050 5,295 5,458 Operational risk 7,054 6,794 1,429 - Transitional scheme 13,216 11,786 93,995 89,508 Risk-weighted balance sheet 116,651 119,124

4,230 4,028 Minimum requirement common equity tier 1 capital 4.5% 5,249 5,361 Buffer requirement 2,350 2,238 Capital conservation buffer 2.5% 2,916 2,978 2,820 2,685 System risk buffer 3% 3,500 3,574 940 1,343 Countercyclical buffer 1.5% 1,750 1,191 6,110 6,266 Total buffer requirement for common equity tier 1 capital 8,166 7,743 3,990 5,446 Available common equity tier 1 capital after buffer requirement 3,728 2,690

18.72% 20.39% Capital ratio 17.52% 16.73% 16.09% 18.47% tier 1 capital ratio 15.63% 14.17% 2.63% 1.92% tier 2 capital ratio 1.90% 2.56% 15.24% 17.58% Common equity tier 1 capital ratio 14.70% 13.26% 19.01% 20.39% Capital ratio IRB 19.76% 18.57% 16.34% 18.47% Tier 1 capital ratio, IRB 17.62% 15.73% 15.48% 17.58% Common equity tier 1 capital ratio, IRB 16.57% 14.71% 7.67% 9.17% Leverage ratio 7.28% 6.30% 74

NOTE 6 FINANCIAL RISK MANAGEMENT • The group shall, insofar as it is possible, price activities and products in line with the underlying risk to ensure the right level of Risk and capital management in SpareBank 1 SR-Bank should risk is assumed create financial and strategic added value through: • The group must draw up robust contingency and recovery plans • a good risk culture characterised by a high awareness of risk so it can manage critical situations in the best possible way should management and the group's core values they arise • a good understanding of which risks drive earnings • The group must have clear, unambiguous definitions of the • pricing activities and products in line with their underlying risk, various types of risk insofar as this is possible • having adequate financial strength based on a chosen risk profile SpareBank 1 SR-Bank is exposed to various types of risk: and simultaneously striving for optimal capital allocation to the various business areas Credit risk: the risk of loss resulting from the inability or • utilising diversification effects unwillingness of customers or counterparties to fulfil their • preventing single events seriously damaging the group's financial obligations position Liquidity risk: the risk that the group is unable to refinance its debt or SpareBank 1 SR‑Bank bases its risk and capital management on does not have the ability to fund increases in assets without the following main principles: significant additional costs • The group's risk and capital management framework must be documented and based on the best international practices Market risk: the risk of loss due to changes in observable market • The group must have a management and control structure that variables such as interest rates, foreign exchange rates and securities promotes prudent, independent management and control markets • The risk and capital management must form an integral part of the management and decision process in the group Operational risk: the risk of losses due to weak or inadequate • Risk and capital management in the group shall support the internal processes or systems, human error or external incidents group's strategic development and achievement of objectives while ensuring financial stability and sound management of assets Ownership risk: the risk that SpareBank 1 SR-Bank bears if it suffers • The group must have a good risk culture characterised by a high negative results from stakes in strategically owned companies and/or awareness of risk and capital management the need to inject fresh capital into these companies. Owned • The board must approve the group's desired risk profile on at least companies are defined as companies where SpareBank 1 SR-Bank an annual basis has a significant stake and influence. • The difference between group's willingness to assume risk and its capacity to assume risk must represent a buffer that is sufficient Compliance risk: the risk that the group incurs public sanctions/ to ensure that no single events can seriously damage the group's penalties or financial loss as a result of failure to comply with financial position legislation and regulations. • The risk identification process must be implemented regularly, look forwards, and cover all significant areas of risk Business risk: the risk of unexpected income and cost variations due • Quantification of risk must be based on recognised methods and to changes in external factors such as market conditions or be sufficiently conservative to properly take account of any government regulations weaknesses in the model • Thorough analyses must be carried out of the identified risks in Reputation risk: the risk of a failure in earnings and access to capital order to understand the risks' effects on income, costs and losses because of lack of trust and reputation in the market, i.e. customers, • Effective management and control measures must be established counterparties, stock market and authorities for the individual risks based on the risk analysis. Measures that reduce probability shall take precedence over measures that Strategic risk: the risk of losses resulting from the wrong strategic reduce consequences decisions • The group must prepare a minimum 5-year financial prognosis at least once a year, and this must as a minimum cover expected Concentration risk: the risk of an accumulation of exposure to an financial developments, as well as a period involving a serious individual customer, sector or geographical area arising. Sectoral financial set back – the serious financial set back must be severe, concentration risk is exposure that can arise across different types of but realistic risk or business areas in the group, e.g. due to common underlying • The return on risk-adjusted capital is one of the most important risk drivers such as the price of oil strategic performance goals in the internal management of the group Risk exposure in SpareBank 1 SR-Bank • The group must carry out comprehensive, periodic risk follow-up SpareBank 1 SR-Bank is exposed to various types of risk and the most and reporting important risk groups are described below: 75

Credit risk is managed via the framework procedures for granting between 60% - 90%, depending on the customer's probability of credit, monitoring commitments and portfolio management. The default. Guarantees are multiplied by a conversion factor of either group's credit strategy comprises overriding credit strategy limits to 50% or 100%, depending on the type of guarantee. ensure a diversified portfolio and a satisfactory risk profile. This limits 3. Loss given default (LGD): This is an estimate of how much the probability of default, expected losses, risk-adjusted capital and the group can potentially lose if the customer defaults on his how high the total loan exposure can be in the corporate market. obligations. The valuation takes in account the value of underlying securities and the costs the group incurs from recovering defaul- The group particularly focuses on the concentration risk associated ted commitments. The group sets realisation values on collateral with exposure to large individual customers and certain industries. security lodged based on experience over time, and such that In order to avoid undesirable concentration risk, the strategic credit these, based on a conservative assessment reflect the expected limits also set restrictions in relation to exposure and risk profile at a realisation value in a period of recession. Seven different classes portfolio level, and for different industries and individual customers. are used (1 – 7) for classifying commitments in relation to loss These restrictions are additional to the limits stipulated by the given default. Regulation regarding Major Commitments. The group's credit policy guidelines stipulate minimum requirements that apply to all types The group continuously develops and tests the risk management of financing, except commitments granted as part of the exercise of system and the credit granting process to ensure that it is of high special credit hedging authorities. In addition to the general credit quality over time. Quantitative validation is intended to ensure policy guidelines, a set of more specific credit policy guidelines that the estimates used for the probability of default, exposure at related to sectors or segments that can entail a special risk have been default and loss given default are always of adequately good quality. prepared. For example, in the case of financing property commit- Analyses are carried out to assess the models' ability to rank the ments, minimum requirements are imposed for equity, advance customers according to risk (discrimination ability), and the ability to sales of housing projects and degree of financing in relation to rental determine the correct level for the risk parameters. In addition, the income on rental property. stability of the models' estimates and the models' cyclical sensitivity are analysed. The quantitative validation will, in certain circumstan- The board is responsible for the group's granting of loans and credit, ces, be supplemented by more qualitative valuations, especially if but delegates the responsibility to the chief executive, within certain only limited statistical data is available. limits. The chief executive then delegates these within his own authority. Delegated credit authority is linked to a commitment's In addition to the credit risk in the lending portfolio, the group has probability of default and security cover. The authority is personal. credit risk through its exposure in the liquidity reserve portfolio. The credit review routines regulate in detail all factors related to the This portfolio consists mainly of low risk certificates and bonds that granting of credit by the group and follow-up of commitments. qualify for loans from Norges Bank. The group is also exposed to credit risk through the portfolio in SpareBank 1 SR-Finans AS, which The group utilises credit models for risk classification, risk pricing principally consists of leasing and car loans. The portfolio accounts and portfolio management. The risk models are based on three main for around 3% of total lending exposure. For further information components: please see notes 7 to 14.

1. Probability of default (PD): Customers are classified into default Liquidity risk is managed via the group's general liquidity strategy, classes based on the probability of them defaulting on their which is reviewed and adopted by the board at least once a year. obligations during a period of 12 months, based on a long-term Liquidity management is based on conservative limits and reflects outcome in a complete loss cycle. The probability of default is the group's moderate risk profile. The group's treasury department calculated on the basis of historical series of data for financial key is responsible for liquidity management, while the risk management figures related to earnings and deterioration, as well as the basis and compliance department monitors and reports on the utilisation of non-financial criteria such as conduct and age. When funding of limits in accordance with the liquidity strategy. commercial property for leasing, a special credit model must be used internally that calculates the probability of default based on The group's lending is mainly funded by customer deposits and the expected cash flow from the leasing activities combined with long-term security debt. The liquidity risk is restricted by diversifying behavioural criteria. Nine default classes (A – I) are used to classify securities issued in terms of markets, funding sources, instruments the customers according to the probability of default. The group and maturity periods. has two additional default classes (J and K) for customers with defaulted and/or written-down commitments. For further information see notes 17 and 18. 2. Exposure at default (EAD): This is an estimate of what the group's exposure will be were a customer to default. This exposure con- Market risk is managed through the market risk strategy, which sists of lending volume, guarantees and approved, but not drawn defines the group's willingness to assume risk. The strategy and the limits respectively. For the retail market, approved, but not drawn associated specification of the necessary risk ceilings, reporting limits are multiplied by a conversion factor of 100%. For the cor- procedures and authorities are reviewed and adopted by the board at porate market, approved but not drawn facilities are multiplied by least once a year. a conversion factor that for customers with a normal score varies 76

Market risk in SpareBank 1 SR-Bank primarily relates to the group’s In order to ensure that the management is performed on the basis long-term investments in securities. In addition, the group is exposed of an up-to-date and relevant risk picture, the group takes a dynamic to some market risk through trading activities in interest rate and approach to managing operation risk in which new and changed currency markets, as well as from activities that underpin ordinary risk estimates are updated on an ongoing basis and risk reducing funding and lending activities. The group's market risk is measured measures are assessed. In addition to this, a total review is conducted and monitored on the basis of conservative limits that are renewed each year for important business areas together with process and risk and approved by the board at least once a year. The size of the limits owners. is determined on the basis of stress tests and analyses of negative market movements. The group's exposure to market risk is moderate. SpareBank 1 SR-Bank regards corporate culture as the most important single factor in operational risk management. Therefore, Interest rate risk is the risk of losses incurred due to changes in every employee in the organisation is regularly surveyed on interest rates. The group's interest rate risk is regulated by limits for operational risk culture. maximum value change following a change in the interest rate level of 1 percentage point. The interest rate commitments for the group's Ownership risk is managed through active board participation in instruments are mostly short-term and the group's interest rate risk a number of the part-owned companies. SpareBank 1 SR-Bank is is low. mainly exposed to ownership risk through its stakes in SpareBank 1 Gruppen AS (19.5%), BN Bank ASA (23.5%), Currency rate risk is the risk of losses due to fluctuations in foreign SpareBank 1 Boligkreditt AS (13.9%), exchange rates. The group measures currency risk on the basis of net SpareBank 1 Næringskreditt AS (21.9%), SpareBank 1 Kredittkort AS positions in the different currencies in which the group has exposure. (17.9%), and SpareBank 1 Mobilbetaling AS (19.7%). Currency risk is regulated by nominal limits for maximum aggregate currency positions and maximum positions within individual curren- Compliance risk is managed via the framework regulations for cies. The scope of the group's trading in foreign currency is modest compliance that are primarily based on EBA Internal Governance and the currency rate risk is considered low. GL44, Basel Committee on Banking Supervision, 'Compliance and the compliance function in banks', ESMA 'Guidelines on certain Price risk is the risk of losses that arise following changes in the aspects of the MiFID compliance function requirements value of the group’s bonds, certificates, and equity instruments. The ESMA/2012/388', and the Financial Supervisory Authority of Norway's spread risk is defined as the risk of changes in the market value of 'Module for evaluating overriding management and control'. bonds as a result of general changes in the credit spreads. Credit SpareBank 1 SR-Bank’s compliance policy is intended to ensure the spread risk expresses the potential loss in the bond portfolios beyond group does not incur any public sanctions/penalties, or any financial the bankruptcy risk. Quantification of the risk-adjusted capital for loss, due to a failure to implement or comply with legislation and spread risk in the bond portfolios is calculated based on the Financial regulations. The group's compliance policy is adopted by the board Supervisory Authority of Norway's model for risk-based supervision and describes the main principles for responsibility and organisation. of market risk in insurance companies. The group's risk exposure to this type of risk is regulated through limits for maximum investments SpareBank 1 SR-Bank is cognisant of the need to have good in the different portfolios. processes to ensure compliance with legislation and regulations. Focus areas are continuous monitoring of compliance with the For more information see notes 15, 16 and 28. current regulations and ensuring that the group has adapted to future regulatory changes as best as it can. Operational riskis managed via a risk strategy that is set annually by the board and which defines the group's willingness to assume risk. SpareBank 1 SR-Bank's compliance function is organised According to the current strategy, this requires the group to strive for independently of the business units. The department bears overall a good balance between trust and control that ensures efficiency responsibility for the framework, monitoring and reporting within is safeguarded, at the same time as ensuring it is not exposed to the area. The investment firm and subsidiaries have their own unnecessary risk. The strategy includes specific limits for the level of compliance officers where this is required. operational risk exposure that will be permitted. 77

NOTE 7 FINANCIAL INSTITUTIONS - RECEIVABLES AND LIABILITIES (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 Loans to and receivables from financial institutions 2,212 2,314 At call 2,314 2,214 6,601 7,824 With agreed maturities or notice 2,020 770 8,813 10,138 Total 4,334 2,984

Specified by the most important currencies 8,201 7,550 NOK 2,018 2,805 106 2,126 EUR 2,116 106 402 419 USD 157 7 104 43 Other currencies 43 66 8,813 10,138 Total 4,334 2,984

1.8% 1.9% Average interest rate 1.9% 1.8%

Debt to financial institutions 3,883 1,813 At call 1,258 3,176 1,157 1,417 With agreed maturities or notice 1,415 1,155 12 1 Accrued interest 1 12 5,052 3,231 Total 2,674 4,343

Specified by the most important currencies 3,136 1,582 NOK 1,028 2,428 1,222 1,488 EUR 1,488 1,222 675 115 USD 112 674 7 45 Other currencies 45 7 12 1 Accrued interest 1 12 5,052 3,231 Total 2,674 4,343

0.6% 0.6% Average interest rate 0.6% 0.6%

Received securities that can be sold or mortgaged Resale agreements 2,013 1,005 Certificates and bonds 1,005 2,013 2,013 1,005 Total received securities 1,005 2,013

Of which received securities that are sold or mortgaged - - Certificates and bonds - -

Securities that are bought due to a buy back agreement are not recognised since the risks and rewards of ownership of the assets has not been transferred. Such transactions generally involve interest-bearing securities. Received securities, including collateral, are recognised off the balance sheet independent of whether the group is allowed to sell or mortgage the security. When received securities are sold, the group will recognise a liability on the balance sheet. The balance sheet item "Loans to and receivables from financial institutions" includes receivables with resale agreements. 78

NOTE 8 LOANS TO CUSTOMERS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 Distribution by type of receivable - - Financial leasing 5,129 5,183 24,808 19,148 Overdraft facilities and operating credits 26,635 25,705 3,970 3,216 Building loans 3,215 3,970 108,841 99,256 Instalment loans 122,981 119,713 339 132 Excess value of fixed-rate lending/amortisation of front-end fees 118 323 284 272 Accrued interest 301 296 - -741 Net cooperate accounts currency -741 - 138,242 121,283 Gross loans 157,638 155,190 -285 -434 Individual impairments -590 -315 -451 -597 Impairments on groups of loans -676 -518 137,506 120,252 Net loans 156,372 154,357

Distribution by market 75,719 60,523 Retail market 91,171 87,229 61,437 60,954 Corporate market 66,497 66,705 464 143 Public sector 292 637 339 132 Excess value of fixed-rate lending/amortisation of front-end fees 118 323 284 272 Accrued interest 301 296 - -741 Net cooperate accounts currency -741 - 138,242 121,283 Gross loans 157,638 155,190 -285 -434 Individual impairments -590 -315 -451 -597 Impairments on groups of loans -676 -518 137,506 120,252 Net loans 156,372 154,357

Of which subordinated loan capital 45 45 Primary capital 45 45 45 45 Subordinated loan capital recording as lending 45 45

1,906 1,945 Loans to employees 2,500 2,490 725 617 Of which loans in SpareBank 1 Boligkreditt AS 815 945 The terms are one percentage point lower than the standardised rate set by the Ministry of Finance.

28,168 24,177 Loans sold to SpareBank 1 Boligkreditt 24,177 28,168 254 145 Received commissions from SpareBank 1 Boligkreditt 145 254 538 517 Loans sold to SpareBank 1 Næringskreditt 517 538 4 4 Received commissions from SpareBank 1 Næringskreditt 4 4

Total commitment by probability of default (PD) 1) 2) 3) 88,074 77,337 0.00 - 0.50% 104,240 97,124 58,193 50,721 0.50 - 2.50% 59,296 63,894 12,763 13,007 2.50 - 5.00% 14,244 14,197 8,400 7,098 5.00 - 99.9% 8,574 9,290 1,391 2,034 Commitments in default 2,155 1,485 168,821 150,196 Total commitments 188,510 185,990 -19,167 -19,154 Unused credit lines for customers -21,037 -19,388 -11,412 -9,759 Guarantees -9,835 -11,412 138,242 121,283 Gross loans 157,638 155,190

Gross loans by probability of default (PD) 1) 2) 3) 72,498 62,623 0.00 - 0.50% 87,347 81,333 47,127 41,071 0.50 - 2.50% 49,687 52,828 9,857 10,532 2.50 - 5.00% 11,936 11,288 6,805 5,748 5.00 - 99.9% 7,185 7,695 1,332 1,647 Commitments in default 1,806 1,427 623 404 Accrued interest and excess value of fixed-rate lending/amortisation of front-end fees 419 619 - -741 Net cooperate accounts currency -741 - 138,242 121,283 Gross loans 157,638 155,190 79

(Note 8 cont.) Parent bank Group 2015 2016 2016 2015 Individual impairments by risk class 3) 285 434 Commitments in default 590 315 285 434 Total 590 315

Expected annual average net loss by probability of default (PD) 1) 2) 3) 10 9 0.00 - 0.50% 9 10 76 73 0.50 - 2.50% 78 81 55 56 2.50 - 5.00% 60 61 95 90 5.00 - 99.9% 104 106 13 6 Commitments in default 7 16 249 234 Total 258 274

Total commitments by sector and industry 6,124 6,746 Agriculture/forestry 7,094 6,363 1,119 650 Fisheries/fish farming 900 1,301 6,269 4,866 Mining operations/extraction 5,109 6,502 4,014 3,941 Industry 4,534 4,656 3,790 4,602 Power and water supply/building and construction 5,327 4,667 3,378 4,070 Wholesale and retail trade, hotels and restaurants 4,596 3,777 10,829 9,469 Overseas shipping, pipeline transport and other transport 10,042 11,384 35,745 33,217 Property management 33,354 35,880 8,548 8,509 Service sector 10,633 10,531 4,854 3,825 Public sector and financial services 3,837 5,027 84,671 79,895 Total industry 85,426 90,088 84,150 70,301 Retail market 103,084 95,902 168,821 150,196 Total 188,510 185,990

Gross lending by sector and industry 4,204 4,199 Agriculture/forestry 4,549 4,443 721 506 Fisheries/fish farming 755 903 5,097 4,535 Mining operations/extraction 4,780 5,330 2,451 2,320 Industry 2,914 3,093 2,561 2,808 Power and water supply/building and construction 3,533 3,437 2,179 2,358 Wholesale and retail trade, hotels and restaurants 2,885 2,578 9,112 9,189 Overseas shipping, pipeline transport and other transport 9,766 9,666 27,435 27,115 Property management 27,269 27,568 6,104 6,317 Service sector 8,441 8,113 2,037 1,749 Public sector and financial services 1,898 2,209 61,900 61,097 Total industry 66,789 67,342 75,719 60,523 Retail market 91,171 87,229 623 404 Accrued interest and excess value of fixed-rate lending/amortisation of front-end fees 419 619 - -741 Net cooperate accounts currency -741 - 138,242 121,283 Gross loans 157,638 155,190

Individual write-downs by sector and industry 19 7 Agriculture/forestry 8 20 - - Fisheries/fish farming - - - - Mining operations/extraction - - 9 9 Industry 15 12 13 13 Power and water supply/building and construction 26 14 34 25 Wholesale and retail trade, hotels and restaurants 25 40 19 212 Overseas shipping, pipeline transport and other transport 212 19 118 93 Property management 92 121 20 27 Service sector 150 35 - - Public sector and financial services - - 232 384 Total industry 528 261 53 50 Retail market 62 54 285 434 Total 590 315 80

(Note 8 cont.) Parent bank Group 2015 2016 2016 2015 Expected annual average net loss by sector and industry 1) 2) 3 2 Agriculture/forestry 4 4 1 1 Fisheries/fish farming 1 2 18 18 Mining operations/extraction 20 19 14 14 Industry 18 18 48 37 Power and water supply/building and construction 38 52 23 18 Wholesale and retail trade, hotels and restaurants 21 24 21 31 Overseas shipping, pipeline transport and other transport 33 23 77 73 Property management 72 78 20 22 Service sector 28 27 6 4 Public sector and financial services 5 7 231 220 Total industry 240 253 18 14 Retail market 18 21 249 234 Total 258 274

Gross loans by geographic area 99,150 82,287 Rogaland 109,307 111,268 12,170 10,532 Agder counties 13,985 13,719 21,757 19,753 Hordaland 24,118 24,007 2,574 2,490 International 2,502 2,610 2,591 6,221 Other 7,726 3,586 138,242 121,283 Gross loans 157,638 155,190

Loans and receivables related to financial leasing

Gross investments related to financial leasing Up to 1 year 1,724 1,599 Between 1 to 5 years 3,090 3,310 Later than 5 years 504 444 Total 5,318 5,353

Net investments related to financial leasing Up to 1 year 1,579 1,441 Between 1 to 5 years 2,863 3,088 Later than 5 years 489 426 Total 4,931 4,955

1) PD = probability of default 2) The expected average annual net loss is the amount that the parent bank and the group statistically expect to lose on the lending portfolio over a 12-month period. The calculations are based on a long-term average over an economic cycle. 3) In the event of a write-down, all the loan capital is moved to the default class irrespective of earlier classification.

NOTE 9 LOANS SOLD TO SPAREBANK 1 BOLIGKRE- Moody's and Fitch, respectively. SpareBank 1 Boligkreditt AS also DITT AND SPAREBANK 1 NÆRINGSKREDITT issues bonds with a lower rating that are not covered bonds. Loans sold to SpareBank 1 Boligkreditt AS SpareBank 1 Boligkreditt AS acquires loans with collateral in hou- SpareBank 1 Boligkreditt AS is owned by the savings banks that make sing and issues covered bonds in accordance with the regulations up the SpareBank 1 Alliance and shares premises with established for this in 2007. As part of the SpareBank 1 Alliance, the SpareBank 1 Næringskreditt AS in Stavanger. The bank owned a bank can offer SpareBank 1 Boligkreditt AS the opportunity to buy 13.9% stake as at 31 December 2016 (16.7% as at 31 December loans and the bank sells loans to SpareBank 1 Boligkreditt AS as part 2015). The purpose of the mortgage company is to ensure the of its funding strategy. Loans sold to SpareBank 1 Boligkreditt AS are alliance banks access to stable, long-term funding for home secured by collateral in housing up to a ceiling of 75% of their valua­ mortgages at competitive prices. Covered bonds issued by tion. The sold loans are legally owned by SpareBank 1 Boligkreditt AS SpareBank 1 Boligkreditt AS have an Aaa and AAA rating from and the bank has, apart from the right to administer them and 81

(Note 9 cont.) receive commissions, as well as the right to take over fully or partially Næringskreditt AS and the bank has, apart from the right to written down loans, no right to use the loans. At year-end 2016, the administer them and receive commissions for this and the right to book value of transferred loans amounted to NOK 24.2 billion take over fully or partially written down loans, no right to use the (NOK 28.2 billion in 2015). The Bank administers the sold loans and loans. At year-end 2016, the book value of sold loans amounted to receives commissions based on the net return on the loans the Bank NOK 0.52 billion (NOK 0.54 billion in 2015). The Bank administers the has sold less the company's costs. sold loans and receives commissions based on the net return on the loans the Bank has sold less the company's costs. Loans sold to SpareBank 1 Næringskreditt AS SpareBank 1 Næringskreditt AS was established in 2009 and has The loans sold to SpareBank 1 Boligkreditt AS and a licence from the Financial Supervisory Authority of Norway to SpareBank 1 Næringskreditt AS are very well collateralised and are operate as a mortgage company that issues covered bonds. Covered very unlikely to result in losses. Until the first quarter of 2015, the bonds issued by SpareBank 1 Næringskreditt AS have an Aaa bank recognised the loans transferred to SpareBank 1 Boligkreditt AS rating from Moody's. The company is owned by the savings banks and SpareBank 1 Næringskreditt AS in accordance with the rules for that make up the SpareBank 1 Alliance and shares premises with continued commitment. The fair value of the continued commit- SpareBank 1 Boligkreditt AS in Stavanger. The bank owned a 21.9% ment has been calculated and is considered insignificant. The stake as at 31 December 2016 (26.8% as at 31 December 2015). The amounts are thus not recognised gross as an asset and liability in the purpose of the mortgage company is to ensure the alliance banks bank's balance sheet. access to stable, long-term funding for commercial properties at competitive prices. SpareBank 1 Næringskreditt AS acquires loans The agreements between SpareBank 1 Boligkreditt AS and the bank with collateral in commercial property and issues covered bonds and SpareBank 1 Næringskreditt AS and the bank were amended in accordance with the regulations established for this in 2007. As during the first quarter of 2015. The new agreements apply to new part of the SpareBank 1 Alliance, the bank can offer the company loans that are sold by the bank and loans that have previously been the opportunity to buy loans and the bank sells loans as part of its sold by the bank. The new agreements mean that the bank has trans- funding strategy. Loans sold to SpareBank 1 Næringskreditt AS are ferred practically all of the risk and benefits of ownership associated secured by collateral in commercial properties up to a ceiling of 60% with the sold loans. The sale is therefore treated as a pure sale and of their valuation. The sold loans are legally owned by SpareBank 1 the loans are thus fully eliminated from the bank's balance sheet.

NOTE 10 AGE DISTRIBUTION OF DUE BUT NOT WRITTEN DOWN LOANS (Figures in NOK millions)

The table below shows amounts due on loans, overdrafts/deposits and by number of days after their due date that are not due to delays in money-transfer services.

Parent bank 2016 Less than 30 days 31 - 60 days 61 - 90 days More than 91 days Total Loans to and receivables from customers - Retail market 1,190 49 4 74 1,317 - Corporate market 356 26 - 253 635 Total 1,546 75 4 327 1,952

2015 Loans to and receivables from customers - Retail market 1,095 32 20 92 1,239 - Corporate market 377 - - 561 938 Total 1,472 32 20 654 2,178

Group 2016 Loans to and receivables from customers - Retail market 1,347 61 6 89 1,503 - Corporate market 1) 395 31 3 261 690 Total 1,742 92 9 350 2,193

2015 Loans to and receivables from customers - Retail market 1,100 36 24 106 1,266 - Corporate market 419 18 1 594 1,032 Total 1,519 54 25 701 2,299 82

NOTE 11 IMPAIRMENT LOSSES ON LOANS AND GUARANTEES (Figures in NOK millions)

Parent bank 2016 2015 Retail Corporate Retail Corporate Impairment losses on loans and guarantees market market Total market market Total Change in individual impairments in the period -2 236 234 9 -23 -14 Change in collective impairments in the period 3 144 147 5 130 135 Realised losses on commitments previously written down 31 95 126 10 61 71 Realised losses on commitments not previously written down 5 173 178 2 199 201 Change in impairments in repossessed assets in the period - - - - 1 1 Amortised loans -1 7 6 -2 9 7 Recoveries on loans and guarantees previously written down -3 -4 -7 -18 -3 -21 Total impairment losses on loans and guarantees 33 651 684 6 374 380

Individual impairments Individual impairments to cover losses on loans and guarantees as at 1 Jan 63 225 288 54 248 302 Realised losses in the period on loans and guarantees previously written down -31 -95 -126 -10 -61 -71 individually Reversal of impairments in previous years -6 -40 -46 -14 -88 -102

Increase in impairments in commitments previously written down individually 11 22 33 12 53 65

Amortised cost 1 -8 -7 -1 -1 -2

Impairments in commitments not previously written down individually 23 357 380 22 74 96

Individual impairments to cover losses on loans and guarantees as at 31 Dec 61 461 522 63 225 288

Impairments on groups of loans Impairments to cover losses on loans and guarantees as at 1 Jan 45 406 451 40 276 316 Impairments to cover losses on loans and guarantees in the period 2 144 146 5 130 135 Collective impairments to cover losses on loans and guarantees as at 31 Dec 47 550 597 45 406 451

Impairments by sector and industry Agriculture/forestry 0% 3 0% - Fisheries/fish farming 0% - 0% - Mining operations/extraction 0% - 0% - Industry 1% 4 2% 6 Power and water supply/building and construction 1% 8 3% 12 Wholesale and retail trade, hotels and restaurants 1% 5 5% 20 Overseas shipping, pipeline transport and other transport 28% 194 47% 179 Property management 4% 30 8% 31 Service sector 40% 271 -2% -7 Transferred from impairments in groups of loans 21% 147 36% 135 Retail market 3% 22 1% 4 Impairment losses on loans and guarantees 100% 684 100% 380

Non-performing and impaired commitments 2016 2015 2014 2013 2012 Non-performing commitments 917 829 395 804 406 Other impaired commitments 1,069 493 481 378 641 Total impaired loans 1,986 1,322 876 1,182 1,047 Individual impairment losses on loans and guarantees -522 -288 -302 -405 -437 Net impaired commitments 1,464 1,034 574 777 610 83

(Note 11 cont.)

Group 2016 2015 Retail Corporate Retail Corporate Impairment losses on loans and guarantees market market Total market market Total Change in individual impairments in the period 2 275 277 9 -13 -4 Change in collective impairments in the period 6 152 158 8 132 140 Realised losses on commitments previously written down 31 111 142 10 68 78 Realised losses on commitments not previously written down 18 190 208 18 205 223 Change in impairments in repossessed assets in the period - - - - 1 1 Amortised loans -1 7 6 -2 9 7 Recoveries on loans and guarantees previously written down -8 -5 -13 -22 -4 -26 Total impairment losses on loans and guarantees 48 730 778 21 399 420

Individual impairments Individual impairments to cover losses on loans and guarantees as at 1 Jan 63 255 318 60 262 322 Realised losses in the period on loans and guarantees previously written down -31 -110 -141 -10 -68 -78 individually Reversal of impairments in previous years -6 -45 -51 -14 -93 -107

Increase in impairments in commitments previously written down individually 11 22 33 12 53 65

Amortised cost 1 -8 -7 - -2 -2

Impairments in commitments not previously written down individually 27 416 443 22 96 117

Individual impairments to cover losses on loans and guarantees as at 31 Dec 65 530 595 70 248 318

Impairments on groups of loans Impairments to cover losses on loans and guarantees as at 1 Jan 58 460 518 50 328 378 Impairments to cover losses on loans and guarantees in the period 5 152 158 8 132 140 Collective impairments to cover losses on loans and guarantees as at 31 Dec 63 612 676 58 460 518

Impairments by sector and industry Agriculture/forestry 1% 4 0% 2 Fisheries/fish farming 0% - 0% - Mining operations/extraction 0% - 0% - Industry 1% 10 1% 3 Power and water supply/building and construction 3% 21 3% 13 Wholesale and retail trade, hotels and restaurants 1% 5 6% 27 Overseas shipping, pipeline transport and other transport 25% 195 43% 179 Property management 4% 29 7% 30 Service sector 41% 322 2% 10 Transferred from impairments in groups of loans 20% 158 33% 140 Retail market 4% 34 4% 16 Impairment losses on loans and guarantees 100% 778 100% 420

Non-performing and impaired commitments 2016 2015 2014 2013 2012 Non-performing commitments 1,070 853 427 830 460 Other impaired commitments 1,141 548 513 439 589 Total impaired loans 2,211 1,401 940 1,269 1,049 Individual impairment losses on loans and guarantees -595 -318 -322 -446 -424 Net impaired commitments 1,616 1,083 618 823 625

The interest on commitments with an impairment as at 31 December 2016 that was recognised as income in 2016 amounted to NOK 60 million in the bank and NOK 65 million in the group. The fair value of the collateral related to loans and receivables that are the object of individual write-downs is equal to the book value plus the impairment. The collateral is in the form of cash, securities, guarantees and properties. 84

NOTE 12 CREDIT RISK EXPOSURE FOR EACH INTERNAL RISK CLASS (Figures in NOK millions)

Average unse- Total commit- Average unse- Total commit- cured exposure ment cured exposure ment Parent bank 2016 2015 Probability of default (PD) 1) 0.00 - 0.50% 27.5% 77,337 18.7% 88,074 0.50 - 2.50% 30.0% 50,721 29.3% 58,193 2.50 - 5.00% 33.6% 13,007 31.6% 12,763 5.00 - 99.9% 33.1% 7,098 29.5% 8,400 Non-performing and written down 42.6% 2,034 47.0% 1,391 Total 29.3% 150,197 24.1% 168,821

Group Probability of default (PD) 1) 0.00 - 0.50% 22.4% 104,240 17.4% 97,124 0.50 - 2.50% 28.1% 59,296 28.6% 63,894 2.50 - 5.00% 33.3% 14,244 32.0% 14,197 5.00 - 99.9% 32.9% 8,574 30.0% 9,290 Non-performing and written down 42.7% 2,155 46.5% 1,485 Total 25.8% 188,509 23.2% 185,990

1) PD = probability of default 85

NOTE 13 MAXIMUM CREDIT RISK EXPOSURE (Figures in NOK millions)

Maximum exposure to credit risk for balance sheet components, including derivatives. Exposure is shown gross before assets pledged as security and permitted offsetting.

Parent bank Group 2015 2016 2016 2015 Assets 728 889 Receivables from the central bank 889 728 8,813 10,138 Loans to and receivables from financial institutions 4,334 2,984 137,506 120,252 Loans to and receivables from customers 156,372 154,357 20,314 22,042 Certificates and bonds 21,024 19,533 6,133 5,057 Derivatives 4,315 6,135 173,494 158,378 Total credit risk exposure balance sheet items 186,934 183,737

Financial guarantees and loan commitments 11,412 9,759 Guarantees customers 9,835 11,412 - 588 Guarantees others 588 - 5,532 5,371 Unused credit lines for financial institutions - - 19,167 19,154 Unused credit lines for customers 21,037 19,388 1,723 1,558 Loan commitments 1,650 1,807 37,834 36,430 Total financial guarantees and loan commitments 33,110 32,607

211,328 194,808 Total credit risk exposure 220,044 216,344

Credit risk exposure related to financial assets by geographic area Parent bank Group 2015 2016 Banking operations 2016 2015 134,770 115,881 Rogaland 133,119 135,678 14,891 13,099 Agder counties 16,850 16,474 26,709 24,492 Hordaland 28,992 28,895 3,154 3,115 International 3,034 3,137 5,357 11,121 Other 12,710 6,492 184,881 167,709 Total banking operations 194,705 190,676

Market activities 10,546 10,880 Norway 10,091 9,765 9,608 10,886 Europe/Asia 10,657 9,608 160 276 North America/Oceania 276 160 20,314 22,042 Total market activities 21,024 19,533

6,133 5,057 Derivatives 4,315 6,135

211,328 194,808 Total by geographic area 220,044 216,344 86

NOTE 14 CREDIT QUALITY PER CLASS OF FINANCIAL ASSET (Figures in NOK millions)

The Bank manages the credit quality of financial assets in accordance with its internal credit rating guidelines. The table shows the credit quality per class of asset for loan-related assets in the balance sheet, based on the customer's probability of default in % (PD).

Parent bank Commit- ments 2016 0.00 - 0.50% 0.50 - 2.50% 2.50 - 5.00% 5.00 - 99.99% in default Impairments Total Net loans Loans to and receivables from financial institutions 10,138 - - - - - 10,138 Loans to and receivables from customers - Retail market 46,676 11,569 778 1,310 190 -108 60,415 - Corporate market 16,172 29,749 8,172 5,536 727 -923 59,433 - Accrued interest, excess value of fixed-rate 404 lending and amortisation of front-end fees Total net loans 72,986 41,318 8,950 6,846 917 -1,031 130,390

Financial investments Norwegian government bonds - - Listed certificates and bonds 20,364 143 6 88 4 - 20,605 Unlisted certificates and bonds 1,303 - - 3 - - 1,306 Accrued interest 129 1 - 1 - - 131 Total financial investments 21,796 144 6 92 4 - 22,042 Total loan-related assets 94,782 41,462 8,956 6,938 921 -1,031 152,432

Parent bank

2015 Net loans Loans to and receivables from financial institutions 8,813 - - - - - 8,813 Loans to and receivables from customers - Retail market 57,108 15,757 1,079 1,555 220 -98 75,621 - Corporate market 15,494 31,295 8,763 5,740 609 -638 61,263 - Accrued interest, excess value of fixed-rate 623 lending and amortisation of front-end fees Total net loans 81,414 47,052 9,842 7,295 829 -736 146,320

Financial investments Norwegian government bonds ------Listed certificates and bonds 18,726 86 39 202 - - 19,053 Unlisted certificates and bonds 1,128 - - - - - 1,128 Accrued interest ------133 Total financial investments 19,854 86 39 202 - - 20,314 Total loan-related assets 101,268 47,138 9,881 7,497 829 -736 166,634 87

(Note 14 cont.)

Group Commit- ments 2016 0.00 - 0.50% 0.50 - 2.50% 2.50 - 5.00% 5.00 - 99.99% in default Impairments Total Net loans Loans to and receivables from financial institutions 4,305 - - - - - 4,305 Loans to and receivables from customers - Retail market 70,606 17,536 1,075 1,741 213 -129 91,042 - Corporate market 16,770 32,813 9,083 6,524 857 -1,137 64,911 - Accrued interest, excess value of fixed-rate ------419 lending and amortisation of front-end fees Total net loans 91,681 50,349 10,158 8,265 1,070 -1,266 160,677

Financial investments Norwegian government bonds ------Listed certificates and bonds 19,340 143 6 88 4 - 19,581 Unlisted certificates and bonds 1,303 8 - 3 - - 1,314 Accrued interest 127 1 - 1 - - 129 Total financial investments 20,770 152 6 92 4 - 21,024 Total loan-related assets 112,451 50,501 10,164 8,357 1,074 -1,266 181,701

Group

2015 Net loans Loans to and receivables from financial institutions 2,984 - - - - - 2,984 Loans to and receivables from customers - Retail market 65,195 18,782 1,279 1,733 240 -110 87,119 - Corporate market 16,585 33,724 9,940 6,480 613 -723 66,619 - Accrued interest, excess value of fixed-rate ------619 lending and amortisation of front-end fees Total net loans 84,764 52,506 11,219 8,213 853 -833 157,341

Financial investments Norwegian government bonds ------Listed certificates and bonds 17,944 86 39 202 - - 18,271 Unlisted certificates and bonds 1,128 - - - - - 1,128 Accrued interest ------133 Total financial investments 19,072 86 39 202 - - 19,533 Total loan-related assets 103,836 52,593 11,258 8,415 853 -833 176,874

Classification of financial investments: Bonds are allocated to SpareBank 1 SR-Bank's estimated PD based on external ratings. If a security has an official rating, this must be applied, but if no official rating exists, external brokers' shadow ratings are used as the basis for risk classification. The list below illustrates the relationship betwe- en SpareBank 1 SR-Bank's PD and Standard & Poor's rating matrix (Long-Term Credit Ratings).

Bank's risk classification S&P rating PD 0.00% - 0.50% AAA to BBB- PD 0.50% - 2.50% BB+ to BB- PD 2.50% - 5.00% B PD 5.00 - 99.99 % B and lower 88

NOTE 15 MARKET RISK RELATED TO INTEREST RATE RISK (Figures in NOK millions)

The table specifies the effect on the result of a positive parallel shift in the interest rate curve of 1 percentage point at the end of the last 2 years before tax if all financial instruments are measured at fair value.

Parent bank Group 2015 2016 2016 2015 -21 -28 Certificates and bonds -28 -21 -13 -21 Fixed-rate loans to customers -21 -13 -86 -58 Other loans and deposits -86 -86 88 87 Securities issued 127 99 1 -3 Other -3 1 -31 -23 Total interest rate risk -11 -20

Maturity bands -27 -18 0 - 3 months -6 -16 -15 -4 3 - 6 months -4 -15 5 13 6 - 9 months 13 5 8 5 9 - 12 months 5 8 5 -6 12 - 18 months -6 5 - - 18 - 24 months - - -7 -13 2 - 10 years -13 -7 - - 10 years + - - -31 -23 Total interest rate risk -11 -20

Currency 15 5 NOK -2 26 -31 -23 EUR -4 -31 -11 -6 USD -6 -11 -1 3 CHF 3 -1 -3 -2 Other -2 -3 -31 -23 Total interest rate risk -11 -20

Interest rate risk arises because the Group's assets and liabilities may be subject to different fixed-rate periods. Interest rate instrument trading must at all times comply with the adopted limits and authorities. The group's limits define quantitative targets for the maximum potential loss. The commercial risk is quantified and monitored continuously.

The group's general limits for interest rate risk define the maximum loss from a 1 percentage point change in interest rates. The maximum loss following a 1 percentage point change in interest rates totals NOK 85 million with NOK 35 million of the total balance in SR-Bank Markets and NOK 50 million of the total balance in treasury. 89

NOTE 16 MARKET RISK RELATED TO CURRENCY RISK (Figures in NOK millions)

The table shows net foreign currency exposure including financial derivatives as at 31 December, calculated in accordance with section 38-3 of the Capital Requirements Regulations.

Parent bank Group 2015 2016 2016 2015 Currency -46 -75 EUR -75 -46 4 - USD - 4 -2 -13 CHF -13 -2 1 -1 GBP -1 1 -48 -1 SEK -1 -48 1 1 Other 1 1 -90 -89 Total -89 -90

2.7 2.7 Effect on result of 3% change before tax 2.7 2.7

Currency risk arises when differences exist between the group's assets and liabilities in the individual currency. Currency trading must at all times comply with the adopted limits and authorities. The group's limits define quantitative targets for the maximum net exposure in currency, measured in NOK. The commercial risk is quantified and monitored continuously.

The group has defined limits for the net exposure in each currency, as well as limits for aggregated net currency exposure (expressed as the highest of the sum of long and short positions). The overnight price risk for spot trading in currencies must not exceed NOK 100 million per individual currency, and NOK 175 million in aggregate. 90

NOTE 17 LIQUIDITY RISK (Figures in NOK millions)

The table shows cash flows including contractual interest maturity.

Parent bank 1) Upon Less than 3 3 - 12 More than 2016 request months months 1 - 5 years 5 years Total Debt to financial institutions 1,831 318 - 1,090 - 3,239 Deposits from customers 86,184 - - - - 86,184 Securities issued - 6,968 1,501 35,164 10,921 54,554 Subordinated loan capital - 13 123 546 3,139 3,821 Total liabilities 88,015 7,299 1,624 36,800 14,060 147,798

Derivatives Contractual cash flows out - -31,703 -13,906 -36,021 -10,781 -92,411 Contractual cash flows in - 32,046 14,223 38,668 11,530 96,467

2015 Debt to financial institutions 2,276 1,643 2 1,172 - 5,093 Deposits from customers 89,632 - - - - 89,632 Securities issued - 2,596 11,713 36,139 14,373 64,821 Subordinated loan capital - 21 700 550 3,880 5,151 Total liabilities 91,908 4,260 12,415 37,861 18,253 164,697

Derivatives Contractual cash flows out - -25,140 -15,789 -12,249 -4,850 -58,028 Contractual cash flows in - 25,983 16,080 13,850 5,257 61,170

Group 1)

2016 Debt to financial institutions 1,274 318 - 1,090 - 2,682 Deposits from customers 85,914 - - - - 85,914 Securities issued - 7,039 1,728 56,247 16,617 81,631 Subordinated loan capital - 13 123 546 3,139 3,821 Total liabilities 87,188 7,370 1,851 57,883 19,756 174,048

Derivatives Contractual cash flows out - -31,702 -13,852 -24,361 -5,898 -75,813 Contractual cash flows in - 31,991 13,972 25,768 6,301 78,032

2015 Debt to financial institutions 1,567 1,643 2 1,172 - 4,384 Deposits from customers 89,444 - - - - 89,444 Securities issued - 2,611 11,784 45,793 14,373 74,561 Subordinated loan capital - 21 700 550 3,880 5,151 Total liabilities 91,011 4,275 12,486 47,515 18,253 173,540

Derivatives Contractual cash flows out - -25,164 -15,860 -22,143 -4,850 -68,017 Contractual cash flows in - 25,985 16,109 23,577 5,257 70,928

1) Also see note 6 financial risk management. 91

NOTE 18 MATURITY ANALYSIS OF ASSETS AND DEBT/LIABILITIES (Figures in NOK millions)

Parent bank Upon Less than 3 3 - 12 More than 31 Dec 2016 request 1) months months 1 - 5 years 5 years Total Assets Cash and receivables from the central bank 190 889 - - - 1,079 Loans to and receivables from financial institutions 6,476 3,532 - - 130 10,138 Gross loans to customers 42,997 1,128 4,100 16,684 56,374 121,283 - Individual impairments -434 - - - - -434 - Impairments on groups of loans -597 - - - - -597 Loans to customers 41,966 1,128 4,100 16,684 56,374 120,252 Certificates and bonds at fair value 129 5,118 1,936 13,488 1,371 22,042 Financial derivatives 981 387 179 1,901 1,609 5,057 Equities, units and other equity interests 433 - - - - 433 Operations that will be sold 22 - - - - 22 Investments in ownership interests 2,884 - - - - 2,884 Investments in group companies 3,713 - - - - 3,713 Tangible fixed assets and intangible assets 354 - - - - 354 Other assets 344 - - - - 344 Total assets 57,492 11,054 6,215 32,073 59,484 166,318

Liabilities Debt to financial institutions 1,823 318 - 1,090 - 3,231 Deposits from customers 86,184 - - - - 86,184 Securities issued 636 6,478 913 32,500 12,460 52,987 Financial derivatives 400 749 211 630 721 2,711 Payable tax 621 - - - - 621 Deferred tax liabilities 315 - - - - 315 Other liabilities 1,063 - - - - 1,063 Subordinated loan capital - - - - 2,646 2,646 Total liabilities 91,042 7,545 1,124 34,220 15,827 149,758 92

(Note 18 cont.) Group Upon Less than 3 3 - 12 More than 31 Dec 2016 request 1) months months 1 - 5 years 5 years Total Assets Cash and receivables from the central bank 190 889 - - - 1,079 Loans to and receivables from financial institutions 802 3,532 - - - 4,334 Gross loans to customers 49,766 1,432 5,085 23,254 78,101 157,638 - Individual impairments -590 - - - - -590 - Impairments on groups of loans -676 - - - - -676 Loans to customers 48,500 1,432 5,085 23,254 78,101 156,372 Certificates and bonds at fair value 129 5,118 1,936 12,637 1,204 21,024 Financial derivatives 963 387 179 1,515 1,271 4,315 Equities, units and other equity interests 596 - - - - 596 Operations that will be sold 22 - - - - 22 Investments in ownership interests 4,460 - - - - 4,460 Investments in group companies ------Tangible fixed assets and intangible assets 584 - - - - 584 Other assets 622 - - - - 622 Total assets 56,868 11,358 7,200 37,406 80,576 193,408

Liabilities Debt to financial institutions 1,266 318 - 1,090 - 2,674 Deposits from customers 85,914 - - - - 85,914 Securities issued 636 6,478 973 53,134 17,962 79,183 Financial derivatives 363 749 210 558 635 2,515 Payable tax 681 - - - - 681 Deferred tax liabilities 360 - - - - 360 Other liabilities 1,147 - - - - 1,147 Subordinated loan capital - - - - 2,646 2,646 Total liabilities 90,367 7,545 1,183 54,782 21,243 175,120

1) Overdraft facilities and operating credits (including flexi loans) and accrued interest are included in the 'upon request' interval. Non-financial assets and liabilities have for presentation purposes been added to the 'upon request' column. Deposits, with the exception of fixed-rate deposits, have been added to the 'upon request' column but there is no expectation that all deposits would have to be settled within a short space of time. 93

NOTE 19 NET INTEREST INCOME (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015

Measured Measured Measured Measured Measured Measured Measured Measured at at amor- at at amor- at amor- at fair at amor- at fair fair value tised cost Total fair value tised cost Total Total tised cost value Total tised cost value Interest income - 197 197 - 178 178 Interest on receivables from financial institutions 38 38 - 50 50 - 422 4,370 4,792 371 3,813 4,184 Interest on lending to customers 5,035 4,664 371 5,298 4,876 422 407 - 407 418 28 446 Interest on certificates and bonds 425 28 397 402 - 402 - 3 3 - 60 60 Interest on written down loans 65 65 - 2 2 - 829 4,570 5,399 789 4,079 4,868 Total interest income 5,563 4,795 768 5,752 4,928 824

Interest costs 549 42 591 640 40 680 Interest on debt to financial institutions 678 38 640 586 40 546 - 1,355 1,355 - 843 843 Interest on deposits from customers 839 839 - 1,350 1,350 - -474 1,442 968 -551 1,229 678 Interest on securities issued 969 1,561 -592 1,024 1,504 -480 -23 160 137 -34 163 129 Interest on subordinated loan capital 129 163 -34 137 160 -23 - 62 62 - 77 77 Fee to the Norwegian Banks Guarantee Fund 77 77 - 62 62 - 52 3,061 3,113 55 2,352 2,407 Total interest costs 2,692 2,678 14 3,159 3,116 43 777 1,509 2,286 734 1,727 2,461 Net interest income 2,871 2,117 754 2,593 1,812 781

NOTE 20 NET COMMISSIONS AND OTHER OPERATING INCOME (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 134 118 Guarantee commissions 114 128 10 8 Interbank commissions 8 10 18 17 Securities trading 17 18 - - Management 85 92 124 126 Brokerage commissions 86 82 258 164 Commissions from mortgage companies 149 258 291 309 Money-transfer services 308 290 187 194 Insurance services 198 191 104 118 Other commissions 198 153 - - Property sales 348 383 1,126 1,054 Total commissions 1,511 1,605

7 4 Interbank commissions 4 7 60 61 Money-transfer services 61 60 3 3 Other commission costs 7 11 70 68 Total commission costs 72 78

6 5 Operating income from investment properties 4 5 - - Other operating income - - 6 5 Total other operating income 4 5 1,062 991 Net commissions and other operating income 1,443 1,532 94

NOTE 21 NET INCOME/LOSSES FROM FINANCIAL INSTRUMENTS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 -79 8 Net gain/loss on equity instruments 51 -39 -274 -146 Net gain/loss on bonds and certificates -156 -275 91 158 Net derivatives, bonds and certificates 158 91 -66 2 Net counterparty risk, inclusive of CVA 2 -66 -35 -25 Net derivatives, fixed-rate -24 -35 - 12 Net derivatives, debt 7 -3 85 12 Net derivatives, basis swap spread -15 88 105 124 Net gain currency 137 104 -173 145 Net income/loss from financial investments 160 -135 95

NOTE 22 REMUNERATION STATEMENT, Guidelines for the coming financial year PERSONNEL COSTS AND BENEFITS FOR EXECUTIVE PERSONNEL AND ELECTED CEO's remuneration REPRESENTATIVES The total remuneration of the chief executive consists of a fixed salary (main element), variable remuneration, benefits in kind, and The board's statement on the fixing of salaries and pension and insurance plans. The chief executive's fixed salary and other remuneration for executive personnel variable remuneration are set annually by the board based on the recommendation of the remuneration committee. The assessment SpareBank 1 SR-Bank ASA's remuneration policy is based on results achieved in defined target areas, individual perfor- SpareBank 1 SR-Bank ASA has an established remuneration scheme mance and the development of pay in comparable positions. that applies to all employees. The guidelines cover fixed salaries, variable remuneration and employee benefits (pensions, insurance Variable remuneration can be earned annually, but must be based cover and other employee benefits). on goals achieved in the last two years. The CEO can receive group bonuses on a par with other employees. Any variable remuneration, The group's remuneration scheme shall: including group bonuses, may amount to up to 25% of fixed salary • be consistent with the group's overall objectives, risk tolerance and including holiday pay. No performance-based benefits are paid over long-term interests and above the said schemes. Variable pay is not included in pensio- • help promote and encourage good management and control of nable salary. Variable remuneration cannot be awarded to the chief the group's risk executive if no group bonus is paid. • counter overly high or undesirable risk taking • help to avoid conflicts of interest Half of the variable remuneration, with the exception of the group • comply with the Financial Institutions Act, chapter 15 bonus, is paid in the form of shares in SpareBank 1 SR-Bank ASA, where 1/3 of the shares can be awarded in each of the next three years. That part of the variable remuneration that is paid in shares can The total remuneration shall be competitive but the group shall not be reduced if subsequent results and developments indicate it was be a wage leader. It shall ensure that the group attracts, develops based on incorrect assumptions. and retains competent employees over time. The arrangements will ensure a reward model that is perceived to be fair, predictable and The chief executive may also receive benefits in kind to the extent future-oriented and motivating. that the benefits are related to the chief executive's function in the group and are in line with market practice in general. Decision process The board of SpareBank 1 SR-Bank ASA has established a A lifelong pension agreement has been concluded with the remuneration committee consisting of three board members, chief executive in which the retirement age is at the end of the one of which is an employee representative. year in which the chief executive turns 64. The annual service pension up until when the chief executive turns 67 amounts to The remuneration committee prepares matters for the board and is 67% of pensionable pay. From the age of 67, the chief executive mainly responsible for: will receive a supplementary retirement pension which, together • annually reviewing and proposing the total salary and with other pension rights, will constitute 67% of pensionable pay, remuneration for the CEO assuming full earning period. • annually considering proposals for corporate scorecard (CEO's scorecard) The chief executive has no agreement concerning termination • annually considering the group's remuneration scheme, including benefits if he leaves his post prior to reaching retirement age. strategy and guiding principles for variable remuneration • advising the chief executive on matters relating to remuneration Remuneration of other executive personnel and other key benefits and other personnel-related issues for the The chief executive fixes the remuneration of executive personnel group's executive personnel based on the limits discussed by the remuneration committee and • ensuring that the practice of the group's remuneration arrange- guidelines adopted by the board. ments are reviewed annually by an independent control function The remuneration is fixed based on an assessment of performance • preparing a statement on the fixing of salaries and other and conditions in the market for the various areas and should remuneration to executive personnel (ref. section 6-16a of the promote good performance and ensure that the group achieves Public Limited Liability Companies Act) strategic goals. The remuneration arrived at must not damage the • considering other conditions as determined by the board and/or group's reputation nor shall the group be a market leader. The remuneration committee remuneration should ensure that the group has the ability to attract • reviewing other personnel-related matters concerning the and retain executives with the skills and experience required. Group's remuneration scheme that are likely to involve significant reputation risk Variable remuneration is determined on the basis of the group's achieved return on equity and other targets set in the balanced 96

(Note 22 cont.) scorecard. This will be a combination of quantitative attainment 62 years are entitled to a pension equivalent to 70% of pensionable of set result targets and a qualitative comprehensive assessment income in the form of service pension, from age 62 to age 67. of how the targets were attained. Variable remuneration can be earned annually, but must be based on goals achieved in the last No executive personnel have an agreement concerning termination two years. Executive personnel may receive a group bonus on a par benefits upon leaving his/her post prior to reaching retirement age. with other employees. Any variable remuneration, including group bonuses, may amount to up to 25% of fixed salary including holiday Remuneration for executive personnel with supervision duties pay. Variable remuneration cannot be awarded if no group bonus is The remuneration paid to executive personnel with supervision paid. No performance-based benefits are paid over and above the duties must be independent of the results of the operations they said schemes. Variable remuneration is not included in pensionable supervise. salary. The executive vice president, risk management and complian- ce and the executive vice president organisation and HR receive no Employees with control functions do not receive variable remunera- variable remuneration beyond group bonuses. tion beyond group bonuses.

Half of the variable remuneration, with the exception of the group Remuneration for employee representatives and other employees bonus, is paid in the form of shares in SpareBank 1 SR-Bank ASA, with remuneration equivalent to executive personnel where 1/3 of the shares can be awarded in each of the next three The remuneration will comply with the aforementioned guidelines years. That part of the variable remuneration that is paid in shares for executive personnel. can be reduced if subsequent results and developments indicate it was based on incorrect assumptions. Benefits in kind can be offered Group bonus to executive personnel to the extent that benefits are linked to each The group has a bonus scheme which includes all employees. function in the group and are in line with market practice in general. Group bonuses are set at an equal percentage of salary, and can, as a maximum, amount to 1.5 month's salary. The group bonus is set by The pension schemes should be seen in the context of other the board based on the financial targets achieved. The group bonus remuneration and should provide competitive terms. Members of is paid entirely in cash. the group executive management team have a retirement age of 62, with the exception of the last two members to be employed, whose Binding guidelines for shares, subscription rights, options, etc. for retirement age is 70. The group executive management team, with the coming financial year the exception of the last two members to be employed, will, from The chief executive and executive management team are able to the age of 67, receive a supplementary retirement pension which, participate in private placements/share saving programmes for em- together with the SpareBank 1 SR-Bank's pension fund, pension from ployees on an equal footing with other employees. former employees, pension from the National Insurance Scheme and statutory early retirement pension (AFP) will constitute 70% of Of the variable remuneration earned in 2016 by the chief executive pensionable pay, assuming full earning period. and other employees subject to the regulations governing remu- The scheme was changed for new members from and including neration in financial institutions, half of the variable remuneration, 2011. In other words, the pension basis of members of the group with the exception of the group bonus, will be paid in the form of a executive management team who were appointed after this date promise of shares in SpareBank 1 SR-Bank ASA. 1/3 of the shares will is limited to 12G. SpareBank 1 SR-Bank has a defined contribution be awarded in each of the next 3 years. based pension scheme with contribution rates of 7% of pensionable income up to 7.1G, and 22% of pensionable income between 7.1G Report on executive pay policy in the preceding financial year and 12G (G = National Insurance basic amount). Members of the The board confirms that the guidelines provided in last year's state- group executive management team who have a retirement age of ment on executive personnel pay for 2016 have been followed. 97

(Note 22 cont.) Personnel costs (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 632 634 Salaries 874 851 -102 85 Pension costs (note 24) 104 -95 91 93 Social security costs 132 128 48 42 Other personnel costs 56 61 669 854 Total personnel costs 1,166 945

945 912 Average no. of employees 1,258 1,233 870 820 No. of full-time equivalents as at 31 Dec 1,127 1,161 937 894 No. of employees as at 31 Dec 1,234 1,249

124,581 126,328 Outstanding no. of shares from bonus share programme 132,150 131,098 - - Outstanding hybrid tier 1 capital from bonus programme 250 288

Remuneration to Outstanding group executive Accrued no. of shares management team Other bonus Total Earned from bonus (Amounts in NOK 1000) Salary remunera- current bene- pension Pension No of share pro- 2016 1) tion 1) year 1) fits rights costs Loans shares 3) gramme Arne Austreid Chief Executive Officer 3,489 136 466 4,091 11,495 1,924 846 88,378 12,450 Inge Reinertsen Chief Financial Officer 2,084 273 283 2,640 11,136 750 7,820 77,093 6,565 Tore Medhus Executive Vice President, Corporate Market 2,085 201 283 2,569 16,089 728 2,653 42,705 6,570 Jan Friestad Executive Vice President, Retail Market 2,051 257 278 2,586 3,869 146 8,433 34,512 6,432 Glenn Sæther Executive Vice President, Business Support 1,783 192 242 2,217 7,394 977 4,403 17,024 5,590 Thor-Christian Haugland Executive Vice President, Communications 1,519 182 207 1,908 9,513 559 3,089 16,019 4,782 Frode Bø 2) Executive Vice President, Risk Management and Compliance 1,828 303 5 2,136 11,902 781 40 17,242 - Inglen Haugland 2) Executive Vice President, Organisation and HR 1,580 406 5 1,992 5,119 146 3,017 25,301 -

2015 Arne Austreid Chief Executive Officer 3,427 143 659 4,230 9,668 2,057 1,034 73,662 9,169 Inge Reinertsen Chief Financial Officer 2,062 279 306 2,647 10,054 763 7,930 63,837 6,090 Tore Medhus Executive Vice President, Corporate Market 2,063 248 306 2,617 15,054 755 5,780 35,438 6,105 Jan Friestad Executive Vice President, Retail Market 2,028 232 301 2,561 3,718 163 8,722 31,372 5,900 Glenn Sæther Executive Vice President, Business Support 1,763 193 261 2,217 6,455 1,075 4,575 14,649 5,137 Thor-Christian Haugland Executive Vice President, Communications 1,503 181 223 1,907 8,843 661 2,920 13,648 4,435 Frode Bø 2) Executive Vice President, Risk Management and Compliance 1,760 314 21 2,094 10,942 728 - 16,268 865 Inglen Haugland 2) (from 1 Feb 2015)Executive Vice President, Organisation and HR 1,419 178 18 1,615 4,928 179 3,325 25,301 - Wenche Drønen Christenssen 2) (until 31 Jan 2015) Executive Vice President, Organisation and HR 115 30 145

For further information on the remuneration of executive personnel, reference is made to the board's statement on the remuneration of executive personnel.

1) Benefits are recognised as costs in the current year. 2) Employees with control functions do not receive variable remuneration beyond group bonuses. 3) No. of shares the person owns in SpareBank 1 SR-Bank as at 31 December. The figures also include shares belonging to immediate family members and known companies in which the person has a controlling influence, ref. section 1-2 of the Limited Liability Companies Act. 98

(Note 22 cont.)

Remuneration of the board and control committee (Amounts in NOK 1000) Other 2016 Fees remuneration Loans No of shares 4)

Dag Mejdell (from 9 Jun 2016) Chair of the board 213 28 14,899 Ingvald Løyning (until 9 Jun 2016) Chair of the board 213 Kate Henriksen Board member 225 41 Jorunn Johanne Sæthre (from 9 Jun 2016) Board member 113 18 Birthe Cecilie Lepsøe Board member 225 85 Erling Øverland 5) (until 9 Jun 2016) Board member 113 35 Odd Torland Board member 225 39 Siv Juvik Tveitnes (until 9 Jun 2016) Board member 113 17 Tor Dahle 5) Board member 225 1,181 4,135 72,456,358 Sally Lund-Andersen Board member (employee representative) 225 839 3,157 941 Oddvar Rettedal (until 9 Jun 2016) Board member (employee representative) 113 944 Kristian Kristensen (from 9 Jun 2016) Board member (employee representative) 125 650 3,114 3,020

2015 Ingvald Løyning Chair of the board 413 - - 41,052 Kate Henriksen (from 4 Jun 2015) Board member 113 18 - - Gunn-Jane Håland (until 4 Jun 2015) Board member 100 22 - - Birthe Cecilie Lepsøe Board member 213 85 - - Erling Øverland 5) Board member 213 70 - 28,935 Odd Torland Board member 213 33 - - Siv Juvik Tveitnes Board member 213 46 - - Tor Dahle 5) Board member 213 1,197 1,810 72,462,443 Sally Lund-Andersen Board member (employee representative) 213 840 3,269 941 Oddvar Rettedal Board member (employee representative) 213 940 833 8,313

Odd Jo Forsell Chair of control committee 6) 140 - 2,841 - Vigdis Wiik Jacobsen Member control committee 90 - - 18,581 Egil Fjogstad Member control committee 90 - - 2,565,000

4) No. of shares the person owns in SpareBank 1 SR-Bank as at 31 December. The figures also include shares belonging to immediate family members and known companies in which the person has a controlling influence, ref. section 1-2 of the Limited Liability Companies Act. In addition to this, the shares of the institution the individual representative was elected on behalf of are included. 5) Erling Øverland was a member of the board and Tor Dahle is the general manager of Sparebankstiftelsen SR-Bank 6) The control committee was wound up with effect from 1 January 2016. 99

NOTE 23 OTHER OPERATING COSTS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 284 300 IT costs 321 301 69 57 Marketing 74 90 69 54 Other administrative costs 69 89 72 70 Depreciation (notes 30 and 31) 75 77 8 5 Impairments (notes 30 and 31) 5 8 38 32 Operating costs real estate 35 41 69 68 Rent premises 89 88 47 51 External fees 75 71 53 43 Other operating costs 123 153 709 680 Total other operating costs 866 918

Fees for external auditor - specification of audit fees (Figures in NOK thousands)

1,824 2,478 Statutory audit 4,755 3,917 52 414 Tax advice 1) 682 251 217 412 Other certification services 1,003 514 600 195 Other non-auditing services 1) 387 1,146 2,693 3,499 Total 6,827 5,828

- 385 1) Fees for Advokatfirmaet PricewaterhouseCoopers that are included in tax advice 469 262 and other non-auditing services

All figures are inclusive of VAT 100

NOTE 24 PENSIONS

The SpareBank 1 SR-Bank Group has, as at 31 December 2016, Paid-up policies will be managed by the pension fund, which from defined contribution pension and defined contribution pension 1 January 2016 became a paid-up fund. A framework agreement has schemes for its employees. The company's and group's pension been established between SpareBank 1 SR-Bank and the pension schemes comply with the requirements of the Mandatory fund that covers things such as financing, capital management, etc. Occupational Pension Act. Because of the responsibilities SpareBank 1 SR-Bank ASA still has, future liabilities will have to be incorporated in the financial The defined benefit pension schemes of SpareBank 1 SR-Bank ASA, statements. The board of the pension fund must consist of SR-Forvaltning AS, and SR-Finans AS was, until 31 December 2015, representatives of the group and pension scheme participants in covered by the group's pension fund. accordance with the pension fund's articles of association.

A decision was taken at the board meeting in June 2015 that In addition to the pension liabilities linked to paid-up policies that are employees who were members of the defined benefit scheme had managed via the pension fund, the group has uncovered pension to transfer to a defined contribution pension scheme from 1 January liabilities. The liabilities apply to people that were not enrolled in 2016. Upon transitioning to a contribution based pension scheme the insurance schemes, supplementary pensions in excess of 12G from 1 January 2016, employees who were in the defined benefit (G = the National Insurance basic amount), ordinary early retirement scheme received a paid-up policy for their earned rights from the pensions and statutory early retirement pension (AFP Scheme). defined benefit scheme. The change reduced pension liabilities. The effects that was recognised in the financial statements in the The new AFP scheme, which applies with effect from 1 January third and fourth quarters of 2015 were: 2011, should be regarded as a defined benefit multi-company scheme, but will be recognised as a defined contribution scheme Parent bank 2015 Q4 2015 Q3 2015 until adequate reliable information is available to allow the bank Curtailments and settlements and the group to recognise their proportional shares of the pension included in the income statement -213 -153 -60 costs, the pension liabilities and the pension funds in the scheme. Thus, the bank's and the group's liabilities are not recognised in the Group 2015 Q4 2015 Q3 2015 balance sheet as liabilities as at 31 December 2016. Curtailments and settlements included in the income statement -226 -163 -63 101

(Note 24 cont.)

The following economic assumptions are made when calculating pension liabilities: 2016 2015 Discount rate 2.60% 2.70% Expected return on assets 2.60% 2.70% Future salary growth rate 2.50% 2.50% Adjustment of NI basic amount (G) 2.25% 2.25% Pension adjustment 2.00% 2.00% Adjustment of paid-up policies 1.60% 1.60% Employer's NI contribution/financial tax 19.10% 14.10% Voluntary retirement before 45 – unfunded scheme 5.00% 5.00% Voluntary retirement after 45 – unfunded scheme 2.00% 2.00%

The remaining average accrual time (in number of years) for members of the unfunded defined benefit 8.73 9.36 plans has been calculated as approximately

The average life expectancy (no. of years) for a person who turns 65 on the balance sheet date is as follows: Man 21.30 21.24 Woman 24.50 24.40

The average life expectancy (no. of years) for a person who 20 years after the balance sheet date turns 65 is as follows: Man 23.10 23.04 Woman 26.40 26.32

The mortality table that has been adjusted for opening mortality and the decline in the mortality rate. K2013BE K2013BE

The pension liabilities are calculated annually by an independent actuary using a straight line accrual method. The present value of the defined benefits are determined by discounting estimated future payments by a discount rate based on the interest rate for a bond issued by the company with a high credit rating (corporate bond or covered bond rate) in the same currency and with a maturity that is almost the same as the maturity of the related pension liabilities. Use of the corporate bond rate as the basis for the discount rate requires the existence of corporate bonds with long maturities and high quality in the same currency, as well as a deep market for such bonds. Market players have asserted that the covered bond market is sufficiently deep and that pricing in the market is reliable. Analyses conducted by an actuary, Gabler AS, and the bank's own analyses, which take into account interest rate swap agreements, support the assertion that a deep and liquid market exists for corporate bonds with a high credit rating, concentrated on covered bonds. The Norwegian covered bond market has become better developed after the financial crisis and has a high credit rating. The bank and the group have therefore chosen the covered bond rate as their discount rate for calculating pension liabilities. 102

(Note 24 cont.) (Figures in NOK millions) Parent bank Group 2015 2016 2016 2015 Book value of liabilities 78 193 Pension benefits – funded scheme 211 94 160 158 Pension benefits – unfunded scheme 167 169 238 351 Total book value of liabilities 378 263

Costs charged to income statement -135 10 Pension benefits – funded scheme 11 -143 11 12 Pension benefits – unfunded scheme 12 12 -124 22 Total costs charged to income statement 23 -131

Pension liabilities related to defined benefit pensions 1,740 1,439 Present value pension liabilities 1 Jan 1,520 1,838 67 6 Pension benefits accrued in the period 7 71 42 35 Interest costs on pension liabilities 37 44 Effect of recalculation: -160 32 - Change in financial assumptions 34 -169 -11 -27 - Experience gains and losses -29 -13 -52 -45 Payments/redemption from fund -48 -53 -187 Reductions -198 1,439 1,440 Present value pension liabilities 31 Dec 1,521 1,520 1,299 1,308 of which fund-based 1,381 1,372 140 132 of which not fund based 140 148

Pension assets 1,192 1,230 Pension assets 1 Jan 1,290 1,247 31 27 Interest income 28 32 -7 -37 Actual return on assets in relation to booked interest income -36 -7 66 6 Employer's NI contributions 6 71 -52 -45 Payments/redemption from fund -47 -53 - -36 Transfer from premium fund to contribution fund -37 - 1,230 1,145 Pension assets 31 Dec 1,204 1,290

Net pension liabilities in the balance sheet 1,439 1,440 Present value pension liabilities 31 Dec 1,521 1,520 1,230 1,145 Pension assets 31 Dec 1,204 1,290 209 295 Net pension liabilities 31 Dec 317 230 29 56 Employer's NI contributions 61 33 238 351 Net pension liabilities in the balance sheet 378 263

Pension costs for the period 67 6 Accrued defined benefit-based pensions 7 71 42 35 Interest costs on pension liabilities 37 44 -31 -27 Interest income -28 -32 -213 - Curtailments and settlements - -226 -135 14 Net defined benefit-based pension costs without employer's NI contributions 16 -143 11 8 Accrued employer's NI contributions 7 12 -124 22 Net defined benefit-based pension costs recognised through profit or loss 23 -131 22 63 Contribution based pension costs and joint AFP scheme 81 36 -102 85 Pension costs in the period recognised in the income statement 104 -95 103

(Note 24 cont.)

Composition of the group's pension assets 2016 2015 Real estate 6 14 - of which used by the bank - - Equities 309 261 Other assets 889 1,015 Total pension assets 1,204 1,290

Development during the last five years for the group's defined benefit-based pension plan 2016 2015 2014 2013 2012 Present value pension liabilities 31 Dec 1,521 1,520 1,838 1,360 1,203 Pension assets 31 Dec 1,204 1,290 1,247 1,148 1,049 Net shortfall 317 230 591 212 154

Sensitivity in calculation of pension liabilities when weighted assumptions change as follows:

Effect on pension liabilities Change in assumption Change in liabilities Change in liabilities Discount rate +/- 0.50% -8.8% 10.1% Wage growth +/- 0.50% 0.4% -0.4% Pension growth +/- 0.25% 4.8% -4.5%

Expected lifetime 1 year 4.1% -4.1%

The sensitivity analysis above is based on a change in one of the assumptions, given that all other assumptions remain constant. This is improbable in practice and changes in some of the assumptions may correlate. Sensitivity calculations are executed using the same method as actuarial calculations for calculating the pension liabilities on the balance sheet. 104

NOTE 25 TAX (figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 1,962 2,264 Pre-tax profit 2,116 2,146 -455 -865 Permanent differences 1) -472 -390 -122 -9 Group contribution - - 444 941 Change in temporary differences 935 412 187 145 - of which recorded directly against equity 145 193 2,016 2,476 Tax base/taxable income for the year 2,724 2,361

544 619 Of which payable tax 25% (27%) 681 637 33 2 Tax effect of group contribution - - -170 -279 Change in deferred tax -279 -163 -68 - Change deferred tax from 27% to 25% - -77 1 1 Excess/insufficient payable tax allocation in previous years 1 3 340 343 Total tax cost 403 400

Explanation of why the tax cost for the year is not 25% of pre-tax profit 530 566 25% (27%) tax on pre-tax profit 529 579 -123 -216 25% (27%) tax on permanent differences 1) -118 -105 - 2 Change in deferred tax from previous years 1 - -10 Change in deferred tax upon withdrawals from pension fund -10 - -68 - Change deferred tax from 27% to 25% on permanent differences - -77 1 1 Excess/insufficient tax allocation in previous years 1 3 340 343 Calculated tax cost 403 400

Deferred tax asset -117 -146 - deferred tax asset that reverses in more than 12 months -169 -132 -7 -2 - deferred tax asset that reverses within 12 months -3 -7 -124 -147 Total deferred tax asset -172 -139

Deferred tax 736 462 - deferred tax that reverses in more than 12 months 532 793 31 2 - deferred tax that reverses within 12 months - - 767 465 Total deferred tax 532 793

643 317 Net deferred tax/deferred tax asset 360 654

Change in deferred tax -212 -326 Year's change in deferred tax on the balance sheet -294 -167 42 32 Change in deferred tax for group contributions on the balance sheet - -68 - Change deferred tax from 27% to 25% on the balance sheet - -73 68 15 - of which change not recorded in income statement 15 77 -170 -279 - of which change recorded in income statement -279 -163

Specification of temporary differences 16 12 Gains and loss account -11 -17 2,743 1,649 Differences related to financial items 1,589 2,741 - - Loans -1 36 -238 -351 Pension liabilities -377 -263 -29 -6 Accounting provisions 29 -1 - - Leasing operating equipment 251 172 -43 -44 Tangible fixed assets -40 -50 123 9 Group contribution paid - - - Losses carried forward -2 2,572 1,269 Total temporary differences 1,440 2,616

25% 25% Tax rate applied 25% 25%

1) Includes tax-exempted dividends, non-tax-deductible expenses, net tax-exempt gains on the realisation of equities in the European Economic Area (EEA), and tax allowances for profit attributable to associated companies (the percentage of the profit is extracted as it has already been taxed in the individual company). 105

NOTE 26 CLASSIFICATION OF FINANCIAL INSTRUMENTS (Figures in NOK millions)

Financial instruments at fair value through profit Group or loss Financial assets and liabilities Financial assessed at Financial derivatives amortised cost assets Financial Held for Recognised at as hedging and accrued available for assets held to 2016 sale fair value instruments interest sale maturity Total Assets Cash and receivables from the central bank 1,079 1,079 Loans to and receivables from financial institutions 4,334 4,334 Loans to customers 9,336 147,036 156,372 Certificates and bonds at fair value 18,833 2,191 21,024 Financial derivatives 1,472 2,843 4,315 Equities, units and other equity interests 560 36 596 Operations that will be sold 22 22 Other assets 622 622 Total assets 19,393 10,830 2,843 153,071 36 2,191 188,364

Liabilities Debt to financial institutions 2,674 2,674 Deposits from customers 85,914 85,914 Securities issued 1) 79,183 79,183 Financial derivatives 1,969 546 2,515 Other liabilities 1,147 1,147 Subordinated loan capital 1) 2,646 2,646 Total liabilities 1,969 546 171,564 174,079

2015 Assets Cash and receivables from the central bank 931 931 Loans to and receivables from financial institutions 2,984 2,984 Loans to customers 10,565 143,792 154,357 Certificates and bonds at fair value 19,533 19,533 Financial derivatives 3,030 3,105 6,135 Equities, units and other equity interests 344 97 441 Operations that will be sold 168 168 Other assets 2,243 2,243 Total assets 19,877 13,763 3,105 149,950 97 186,792

Liabilities Debt to financial institutions 4,343 4,343 Deposits from customers 89,444 89,444 Securities issued 1) 71,979 71,979 Financial derivatives 2,420 1,319 3,739 Other liabilities 880 880 Subordinated loan capital 1) 3,459 3,459 Total liabilities 2,420 1,319 170,105 173,844

1) Securities issued and subordinated loan capital contain secured debt. 106

(Note 26 cont.)

Information about fair value Group

The table below shows financial instruments at fair value according to their valuation method. The different levels are defined as follows: Listed price in an active market for an identical asset or liability (level 1). Valuation based on observable factors other than listed price (used in level 1) either direct (price) or indirect (deduced from prices) for the asset or liability (level 2). Valuation based on factors not obtained from observable markets (non-observable assumptions) (level 3).

Valuation according Valuation according Valuation according to prices in an active to observable market to factors other than 2016 market data observable market data Total Assets Loans to customers 9,336 9,336 Certificates and bonds at fair value 13,343 5,490 18,833 Financial derivatives 4,315 4,315 Equities, units and other equity interests 266 133 197 596 Operations that will be sold 22 22

Liabilities Financial derivatives 2,515 2,515

2015 Assets Loans to customers 10,565 10,565 Certificates and bonds at fair value 15,109 4,424 19,533 Financial derivatives 6,135 6,135 Equities, units and other equity interests 186 18 236 440 Operations that will be sold 168 168

Liabilities Financial derivatives 3,739 3,739

No transfers between levels 1 and 2

Change in holding during the financial year of assets valued on the basis of factors other than observable market data

Equities, units and Loans to custo- other equity inte- Operations that mers rests will be sold Group 2016 2016 2016 Balance 1 Jan 10,565 236 168 Additions 476 30 - Disposals -1,498 -8 -146 Transferred from or to measurement according to prices in an active market or observable market data - - - Change in value 2) -207 -61 - Balance 31 Dec 9,336 197 22

Nominal value/cost price 9,123 204 29 Fair value adjustment 213 -7 -7 Balance 31 Dec 9,336 197 22

Group 2015 2015 2015 Balance 1 Jan 9,994 288 22 Additions 3,985 25 137 Disposals -3,319 -145 - Transferred from or to measurement according to prices in an active market or observable market data - - - Change in value 2) -95 68 9 Balance 31 Dec 10,565 236 168

Nominal value/cost price 10,145 180 107 Fair value adjustment 420 56 61 Balance 31 Dec 10,565 236 168 (Note 26 cont.) 107

Sparebanken Hedmark completed its acquisition of Bank 1 Oslo Akershus in other comprehensive income of NOK 95 million. SpareBank 1 SR-Bank in the second quarter of 2016. As far as SpareBank 1 SR-Bank is concerned, received the cash settlement in the second quarter of 2016. This amounted this means that its previous stake in Bank 1 Oslo Akershus has been to NOK 94 million, compared with the amount calculated at the end of realised with settlement in equity certificates in Sparebanken Hedmark. 2015 of NOK 72 million. The cash settlement was posted as dividends via The analysis environment in SpareBank 1 Gruppen has conducted the income statement in the second quarter of 2016. SpareBank 1 SR-Bank a valuation of Sparebanken Hedmark. The valuation is based on a still has an ownership item linked to the postponed cash payment and combination of two methods: multiple pricing and the dividend shares in Visa Norge totalling NOK 34 million. This item is posted in other discounting model. The valuation is used by all of the SpareBank 1 banks comprehensive income and will not affect the result until it is realised. with stakes in Sparebanken Hedmark. Other assets are measured using various methods such as last known SpareBank 1 SR-Bank is a member of Visa Norge FLI. Visa Norge FLI is, as transaction price, earnings per share, dividend per share, EBITDA and a group member of Visa Europe, also a shareholder in Visa Europe Ltd. discounted cash flows. In November 2015, an agreement was announced concerning the sale of Visa Europe Ltd to Visa Inc. The transaction will significantly increase Fixed-rate loans are measured on the basis of the interest rate agreed with the equity in Visa Norge IFS. SpareBank 1 SR-Bank's ownership interests the customer. Loans are discounted using the applicable interest curve, in Visa Norge IFS are considered a financial asset in the available for sale having taken into account a market premium, which is adjusted for the category (AFS investment) and must therefore be recognised at fair value profit margin. The conducted sensitivity analyses indicate an increase in the as long as this can be reliably measured. The remuneration consists of discount rate of 10 basis points would have a negative effect on the result shares in Visa Inc., a cash settlement and a postponed cash payment. On amounting to NOK 26 million. 31 December 2015, the estimated value of the shares resulted in income 2) Value changes are recognised in net income from financial instruments.

Group Fair value of financial instruments at amortised cost Carrying amount Fair value Carrying amount Fair value (Figures in NOK millions) 2016 2016 2015 2015 Assets Cash and receivables from the central bank 1,079 1,079 931 931 Loans to and receivables from financial institutions 4,334 4,334 2,984 2,984 Loans to customers 1) 147,036 147,036 143,792 143,792 Certificates and bonds held to maturity 2,191 2,204 - - Total assets at amortised cost 154,640 154,653 147,707 147,707

Liabilities Debt to financial institutions 2,674 2,674 4,343 4,343 Deposits from customers 1) 85,914 85,914 89,444 89,444 Securities issued 79,183 79,698 71,979 71,577 Subordinated loan capital 2,646 2,668 3,459 3,478 Total liabilities at amortised cost 170,417 170,954 169,225 168,842

1) Customer loans and deposits at amortised cost amount to book value best estimate at fair value.

NOTE 27 CERTIFICATES AND BONDS (Figures in NOK millions)

Parent bank Group 2015 2016 Certificates and bonds 2016 2015 20,188 19,726 Certificates and bonds at fair value 18,710 19,406 - 2,187 Certificates and bonds held to maturity 2,187 - 126 129 Accrued interest 127 127 20,314 22,042 Total certificates and bonds 21,024 19,533

Government 1,488 1,149 Nominal value 1,149 1,488 1,553 1,183 Fair value 1,183 1,553 Other public issuers 2,457 2,754 Nominal value 2,754 2,457 2,453 2,754 Fair value 2,754 2,453 Covered bonds 12,229 13,892 Nominal value 12,817 11,432 12,284 13,934 Fair value 12,859 11,487 Other financial enterprises 3,490 3,706 Nominal value 3,756 3,490 3,570 3,785 Fair value 3,835 3,570 Non-financial enterprises 422 323 Nominal value 336 439 328 257 Fair value 266 343

126 129 Accrued interest 127 127 20,086 21,824 Total certificates and bonds at nominal value 20,812 19,306 20,314 22,042 Total certificates and bonds 21,024 19,533 108

NOTE 28 FINANCIAL DERIVATIVES

General description: The fair value of financial derivatives is determined using valuation methods where the price of the underlying object, for example interest and currency rates, is obtained from the market. If the group's risk position is relatively neutral, normal rates will be used in pricing. A neutral risk position means, for example, that the interest rate risk within a re-pricing interval is approximately zero. Otherwise, the relevant purchase or sales price is used to assess the net position. CVA (Credit Valuation Adjustment) for derivative transactions is assessed on the based of the net positive market values per counterparty. The CVA risk for counterparties that regularly exchange collateral and Norwegian municipalities is considered marginal. For other counterparties, the CVA calculation is based on the probability of default compared with the remaining term to maturity of the derivative positions and loss given default.

The group hedges fixed-rate loans. Each hedge is documented with a reference to the group's risk management strategy, a clear identification of the item being hedged, the hedging instrument used, a description of the hedged risk, a description of why hedging is regarded as highly probable and a description of how and when the group shall determine the efficiency of the hedge during the accounting period and that it is expected to be very effective during the next accounting period. The group has defined the hedged risk as value changes linked to the NIBOR component of the hedged fixed interest rates in NOK and value changes linked to the LIBOR components of the hedged fixed interest rates in foreign currencies.

As at 31 December 2016, the net fair value of the hedging instruments was NOK 1,696 million (NOK 1,880 million in assets and NOK 184 million in liabilities). The corresponding figures for 2015 were NOK 2,225 million (NOK 2,318 million in assets and NOK 93 million in liabilities). There was no ineffective result for hedging instruments in 2016.

ISDA agreements with CSA supplements regulate the counterparty risk through payments of margins in relation to exposure limits. Contract sums and effects of reinvestment costs covered by netting agreements amount to NOK 157.1 billion and NOK 2.0 billion, respectively, as at 31 December 2016. The group has no financial instruments that are booked net.

Group 1) (Figures in NOK millions) 2016 2015 Fair value Fair value At fair value through profit or loss Contract amount Assets Liabilities Contract amount Assets Liabilities

Currency instruments Currency futures (forwards) 3,518 92 26 2,891 239 27 Currency swaps 47,585 254 710 44,129 1,104 323 Currency options 51 1 1 - - - Total currency instruments 51,154 347 737 47,020 1,343 350

Interest rate instruments Interest rate swaps, incl. cross-currency swaps 53,801 1,124 1,231 66,073 1,687 2,068 Other interest rate contracts 160 1 1 164 2 2 Total interest rate instruments 53,961 1,125 1,232 66,237 1,689 2,070

Interest rate instruments, hedging Interest rate swaps, incl. cross-currency swaps 65,503 1,880 184 53,512 2,318 93 Total interest rate instruments, hedging 65,503 1,880 184 53,512 2,318 93

Collateral Collateral 321 140 - 953 Total collateral - 321 140 - - 953

Accrued interest Accrued interest - 642 222 - 785 273 Total accrued interest - 642 222 - 785 273

Total currency instruments 51,154 347 737 47,020 1,343 350 Total interest rate instruments 119,464 3,005 1,416 119,749 4,007 2,163 Total collateral 321 140 - 953 Total accrued interest 642 222 785 273 Total currency and interest rate instruments 170,618 4,315 2,515 166,769 6,135 3,739

1) This note is almost identical for the parent bank. 109

NOTE 29 EQUITIES, UNITS AND OTHER EQUITY INTERESTS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 At fair value through profit or loss 67 140 - Listed 140 67 119 126 - Securities funds 126 119 17 133 - Unlisted 294 158 203 399 Total at fair value through profit or loss 560 344

Available for sale 97 34 - Unlisted 36 97 97 34 Total available for sale 36 97

Total equities, units 300 433 and other equity interests 596 441

Equities, units and other equity interests are classified within the categories fair value and available for sale. Securities that can be measured reliably and are reported internally at fair value are classified as fair value through profit or loss. Other equities are classified as available for sale.

Investments in equities, units and other equity interests

Parent bank Company's No. of equities/ Acquisition Book value/ (Figures in NOK thousands) share capital Stake in % units cost market value

At fair value through profit or loss Sandnes Sparebank 230,149 15.1 3,485,009 149,476 140,097 Listed companies 149,476 140,097

SR-Kombinasjon A 30,000 30,000 39,573 SR-Rente 56,109 55,951 53,797 SR-Utbytte A 20,000 20,000 32,210 Securities funds 105,951 125,580

Unlisted companies Short-term investments in shares Sparebanken Hedmark 5,310,127 1.61 1,713,942 107,978 126,489 Other unlisted companies 25,839 6,642 Total unlisted companies 133,817 133,131

Total at fair value through profit or loss equities, units and other equity interests 389,244 398,808

Available for sale Visa Norge IFS 33,221 Unlisted companies 1,401 Total available for sale 34,622

Total equities, units and other equity interests parent bank 433,430 110

(Note 29 cont.) Investments in equities, units and other equity interests

Group Company's No. of equities/ Acquisition Book value/ (Figures in NOK thousands) share capital Stake in % units cost market value

At fair value through profit or loss Total listed companies parent bank 149,476 140,097 Total listed in subsidiaries - - Total listed companies - group 149,476 140,097

Total combination funds parent bank 105,951 125,580 Total combination funds in subsidiaries - - Total combination funds - group 105,951 125,580

Total unlisted companies - parent bank 133,817 133,131 HitecVision Asset Solutions, LP 1.19 22,450 31,827 Optimarin 13.01 23,588 23,622 SR PE-Feeder III KS 40.50 21,837 19,487 HitecVision Private Equity IV LP 2.00 19,132 9,775 Reiten & Co Capital Partners VII LP 0.49 7,883 9,667 Energy Ventures IV LP 0.01 13,483 9,122 Other unlisted companies in subsidiaries 92,075 57,653 Total unlisted in subsidiaries 200,448 161,153 Total unlisted in group 334,265 294,284 Total at fair value through profit or loss equities, units and other equity interests 589,692 559,961

Available for sale Unlisted companies parent bank 34,662 Unlisted companies in subsidiaries 1,195 Total equities, units and other equity interests - group 595,778 111

NOTE 30 INTANGIBLE ASSETS (Figures in NOK millions)

Parent bank Group Customer Customer contracts Goodwill Total 2016 Total Goodwill contracts 3 - 3 Acquisition cost 1 Jan 2016 63 53 10 - - Additions 32 28 4 - - - Disposals - - - 3 - 3 Acquisition cost 31 Dec 2016 95 81 14

1 - 1 Accumulated depreciation and impairments 1 Jan 2016 2 - 2 - - - Year's disposals - - - 2 - 2 Year's depreciation and impairments 4 - 4 3 - 3 Accumulated depreciation and impairments 31 Dec 2016 6 - 6

- - - Carrying amount 31 Dec 2016 89 81 8

Distribution of carrying amount - - - SR-Forvaltning – acquisition of 33.3% of the shares in May 2009 20 20 - - - - SpareBank 1 SR-Bank - purchase of customer contracts - - - from Swedbank in 2015 SpareBank 1 Regnskapshuset SR – acquisition of SpareBank 1 - - - Regnskapshuset Østland's Rogaland branches in 2015 27 24 3 SpareBank 1 Regnskapshuset SR - - - - acquisition of 100% of the shares in ODB-Regnskap AS in 2015 12 9 3 SpareBank 1 Regnskapshuset SR - acquisition of 100% of the shares in Advis AS i 2016 30 28 2 - - - Carrying amount 31 Dec 2016 89 81 8

2015 - - - Acquisition cost 1 Jan 2015 20 20 - 3 - 3 Additions 43 33 10 - - - Disposals - - - 3 - 3 Acquisition cost 31 Dec 2015 63 53 10

- - - Accumulated depreciation and impairments 1 Jan 2015 ------Year's disposals - - - 1 - 1 Year's depreciation and impairments 2 - 2 1 - 1 Accumulated depreciation and impairments 31 Dec 2015 2 - 2

2 - 2 Carrying amount 31 Dec 2015 61 53 8

Distribution of carrying amount - - - SR-Forvaltning – acquisition of 33.3% of the shares in May 2009 20 20 - SpareBank 1 SR-Bank - purchase of customer contracts 2 - 2 2 - 2 from Swedbank in 2015 SpareBank 1 Regnskapshuset SR - acquisition of SpareBank - - - 27 24 3 1 Regnskapshuset Østland's Rogaland branches in 2015 SpareBank 1 Regnskapshuset SR - acquisition of 100% of - - - 12 9 3 the shares in ODB-Regnskap AS in 2015 2 - 2 Carrying amount 31 Dec 2015 61 53 8

The amounts are the differences between identifiable assets inclusive of excess values and the cost price of the identifiable assets. The elements in the goodwill item relate to future earnings in the company supported by the calculations of the present value of expected future earnings, which document a future economic benefit from acquiring the company. The goodwill item's elements are valued annually and written down if a there is a basis for this following a concrete assessment. 112

NOTE 31 TANGIBLE FIXED ASSETS (Figures in NOK millions)

Parent bank Group Buildings and Machinery, fixtu- Machinery, fixtu- Buildings and real estate res, and vehicles Total Total res, and vehicles real estate 261 753 1,014 Acquisition cost 1 Jan 2016 1,149 836 313 -10 95 85 Additions 167 99 68 - 14 14 Disposals 14 14 - 251 834 1,085 Acquisition cost 31 Dec 2016 1,301 921 381

116 557 673 Accumulated depreciation and impairments 1 Jan 2016 745 627 118 4 66 70 Year's depreciation 73 69 4 - 3 3 Year's impairments 3 3 - - 14 14 Year's disposals 14 14 - 120 612 732 Accumulated depreciation and impairments 31 Dec 2016 807 685 122

132 222 354 Carrying amount 31 Dec 2016 495 236 259

391 Fair value 391

221 708 929 Acquisition cost 1 Jan 2015 1,040 787 253 40 86 126 Additions 165 90 75 - 41 41 Disposals 56 41 15 261 753 1,014 Acquisition cost 31 Dec 2015 1,149 836 313

112 523 635 Accumulated depreciation and impairments 1 Jan 2015 713 589 124 4 67 71 Year's depreciation 75 71 4 - 8 8 Year's impairments 8 8 - - 41 41 Year's disposals 51 41 10 116 557 673 Accumulated depreciation and impairments 31 Dec 2015 745 627 118

146 196 342 Carrying amount 31 Dec 2015 404 209 195

380 Fair value 380

Collateral The group has not mortgaged/pledged or accepted any other disposal restrictions on its tangible fixed assets.

Revaluation/ depreciation The group does not make regular revaluations of tangible fixed assets. In connection with the initial implementation of IFRS, buildings were valued at cost less accumulated depreciation in accordance with current Norwegian legislation. Percentage rate of depreciation is 10% to 33% for machinery, equipment and vehicles, and 2% for bank buildings, investment property and other real estate.

Buildings and real estate Of the total book value of buildings and real estate NOK 111 million is for use in the banking business. The fair value of buildings is determined by appraisal.

Operational leases The group has no significant operational leases. 113

NOTE 32 OTHER ASSETS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 15 10 Income earned but not received from SpareBank 1 Boligkreditt and SpareBank 1 Næringskreditt 10 15 25 30 Prepaid costs 32 29 - 9 Over funding of pension liabilities 9 - 35 200 Paid in capital SR-Bank Pension Fund 200 35 1,756 46 Unsettled trades 46 1,756 132 49 Other assets 325 408 1,963 344 Total other assets 622 2,243

NOTE 33 DEPOSITS FROM CUSTOMERS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 78,834 75,076 Deposits from and liabilities to customers, at call 74,821 78,658 10,796 11,102 Deposits from and liabilities to customers with agreed maturity 11,087 10,783 2 6 Accrued interest 6 2 89,632 86,184 Total deposits from customer 85,914 89,444

Deposits by sector and industry 1,146 1,166 Agriculture/forestry 1,166 1,146 351 460 Fisheries/fish farming 460 351 2,529 1,226 Mining operations/extraction 1,226 2,529 1,426 1,305 Industry 1,305 1,426 2,090 1,968 Power and water supply/building and construction 1,968 2,090 2,599 2,529 Wholesale and retail trade, hotels and restaurants 2,529 2,599 1,662 2,084 Overseas shipping, pipeline transport and other transport 2,084 1,662 7,078 5,640 Property management 5,640 7,078 12,431 9,710 Service sector 9,440 12,243 16,217 17,923 Public sector and financial services 17,923 16,217 47,529 44,011 Total industry 43,741 47,341 42,101 42,908 Retail market 42,908 42,101 2 6 Accrued interest 6 2 - -741 Net cooperate accounts currency -741 - 89,632 86,184 Total deposits by sector and industry 85,914 89,444

Deposits by geographic area 63,695 63,350 Rogaland 63,080 63,507 7,272 6,784 Agder counties 6,784 7,272 8,485 8,617 Hordaland 8,617 8,485 4,605 1,023 International 1,023 4,605 5,576 6,410 Other 6,410 5,576 89,632 86,184 Total deposits by geographic area 85,914 89,444 114

NOTE 34 SECURITIES ISSUED (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 60,336 50,578 Bond debt 1) 76,536 68,935 2,209 1,773 Value adjustments 1,950 2,242 793 636 Accrued interest 697 802 63,338 52,987 Total securities issued 79,183 71,979

2.3% 2.0% Average interest rate 1.9% 2.3%

Securities issued by due date 1) Maturity 11,699 - 2016 - 11,699 10,309 7,389 2017 7,449 12,010 13,702 12,353 2018 12,353 13,702 6,134 6,028 2019 11,025 6,134 6,313 5,990 2020 14,686 13,244 7,447 8,128 2021 14,934 7,447 97 5,972 2022 5,972 97 1,498 1,721 2023 6,182 1,498 329 323 2025 323 329 - 89 2026 89 - - - 2031 91 - - - 2032 841 - 442 420 2033 420 442 113 108 2034 108 113 315 308 2035 308 315 208 187 2037 187 208 2041 183 341 325 2043 325 341 1,329 1,264 2044 1,264 1,329 257 249 2045 249 257 207 - 2046 - 207 436 184 2047 184 436 261 248 2053 248 261 1,108 1,065 2054 1,065 1,108 793 636 Accrued interest 697 802 63,338 52,987 Total securities issued 79,183 71,979

Securities issued by currency 1) 13,956 11,162 NOK 21,201 17,755 42,959 36,252 EUR 52,348 47,792 1,997 1,568 SEK 1,568 1,997 2,752 2,593 CHF 2,593 2,752 881 776 USD 776 881 793 636 Accrued interest 697 802 63,338 52,987 Total securities issued 79,183 71,979

1) Own certificates and bonds have been deducted.

Exchange rate Group Balance 31 Matured/rede- and other Balance 31 Change in securities issued Dec 2016 Issued 2016 emed 2016 changes 2016 Dec 2015 Bonds, nominal value 76,536 29,236 -19,332 -2,303 68,935 Value adjustments 1,950 - - -292 2,242 Accrued interest 697 - - -105 802 Total securities issued 79,183 29,236 -19,332 -2,700 71,979 115

NOTE 35 OTHER LIABILITIES (Figures in NOK millions)

Parent bank Group 2015 2016 Other liabilities 2016 2015 238 351 Pension liabilities (note 24) 378 263 3 88 Specified loss provisions guarantees 5 3 27 30 Accounts payable 58 45 39 39 Tax deducted 55 53 - 146 Unsettled trades 146 - 162 207 Other liabilities 222 194 71 65 Accrued holiday pay 92 97 168 137 Other accrued costs 191 225 708 1,063 Total other liabilities 1,147 880

Guarantees issued (amounts guaranteed) 1,883 910 Payment guarantees 910 1,883 2,625 2,554 Performance bonds 2,554 2,625 2,407 2,405 Loan guarantees 2,405 2,407 146 130 Guarantees for tax 130 146 4,351 3,760 Other guarantee liabilities 3,836 4,351 11,412 9,759 Total guarantees customers 9,835 11,412 - 588 Other guarantees 588 - 11,412 10,347 Total guarantees issued 10,423 11,412

Other liabilities 5,532 5,371 Unused credit lines for financial institutions - - 19,167 19,154 Unused credit lines for customers 21,037 19,388 1,723 1,558 Approved loan commitments 1,650 1,807 18 23 Letters of credit 23 18 26,440 26,106 Total other liabilities 22,710 21,213

38,560 36,928 Total liabilities 33,692 33,505

Security pledged 9,292 17,096 Securities pledged as security 17,096 9,292

Ongoing legal disputes The group is a party in a number of court cases with a total financial scope that is not considered to be significant, inasmuch as the group has made provisions for losses in those cases where it is assumed more likely than not that the group will incur a loss as a result of the cases.

Operational lease payments The group's operational leases have terms of 3-5 years. The annual cost is approximately NOK 6 million.

NOTE 36 RESTRICTED FUNDS (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 39 39 Tax deducted 55 53 39 39 Total restricted funds 55 53 116

NOTE 37 SUBORDINATED LOAN CAPITAL (Figures in NOK millions)

Parent bank Group

2015 2016 Principal Terms Maturity First due date 2016 2015

Non-perpetual 746 - 750 NOK 3-month NIBOR + 3.50% per annum 2021 2016 - 746 499 499 500 NOK 3-month NIBOR + 1.80% per annum 2023 2018 499 499 502 465 50 EUR 4% per annum until 21 Dec 2017, thereafter 6-month NIBOR + 1.725% per annum 2030 2030 465 502 825 825 825 NOK 3-month NIBOR + 2.75% per annum 2022 2017 825 825 2,572 1,789 Total non-perpetual 1,789 2,572

Tier 1 capital instruments 759 732 684 NOK 9.35% per annum until 9 Dec 2019, thereafter 3-month NIBOR + 5.75% per annum 2019 732 759 116 116 116 NOK 3-month NIBOR + 4.75% per annum until 9 Dec 2019, thereafter NIBOR + 5.75% per annum 2019 116 116 875 848 Total tier 1 capital instruments 848 875

12 9 Accrued interest 9 12 3,459 2,646 Total subordinated loan capital 2,646 3,459

Subordinated loan capital and hybrid tier 1 bonds (hybrids) in foreign currencies are included in the group's total currency position so that there is no currency risk associated with the loans. Of a total of NOK 2,646 million in subordinated loan capital, NOK 791 million counts as tier 1 capital and NOK 1,778 million as term subordinated loan capital. Capitalised costs associated with borrowing are reflected in the calculation of amortised cost.

Group Subordinated loan capital and hybrid tier 1 capital loans 1) 2016 2015 Ordinary subordinated loan capital, nominal value 1,778 2,550 Hybrid tier 1 capital loans, nominal value 791 795 Value adjustments 68 102 Accrued interest 9 12 Total subordinated loan capital and hybrid tier 1 capital loans 2,646 3,459 Exchange rate and Issued/ Matured/ other Change in debt raised by issuing of subordinated loans/ Balance sale own redeemed changes Balance hybrid tier 1 capital loans 1) 31 Dec 2016 2016 2016 2016 31 Dec 2015 Dated subordinated loan capital, nominal value 1,778 - -746 -26 2,550 Hybrid tier 1 capital loans, nominal value 791 - - -4 795 Value adjustments 68 - - -34 102 Accrued interest 9 - - -3 12 Total subordinated loan capital and hybrid tier 1 capital loans 2,646 - -746 -67 3,459

1) This note is identical for the parent bank. 117

NOTE 38 INVESTMENTS IN OWNERSHIP INTERESTS

Subsidiaries, associated companies and joint ventures

Acquisition Registered Ownership Company date head office in % 1) Investments in subsidiaries Shares held by the parent bank SpareBank 1 SR-Finans 1987 Stavanger 100.00 EiendomsMegler 1 SR-Eiendom 1990 Stavanger 100.00 SR-Forvaltning 2001 Stavanger 100.00 SR-Investering 2005 Stavanger 100.00 SpareBank 1 Regnskapshuset SR 2015 Stavanger 100.00 Finansparken Bjergsted 2014 Stavanger 100.00 Rygir Industrier konsern 2012 Stavanger 100.00 SR-Boligkreditt 2015 Stavanger 100.00 Shares owned by subsidiaries Jærmegleren 2007 Stavanger 100.00 Investments in associated companies Admisenteret 1984 Jørpeland 50.00 SpareBank 1 Boligkreditt 2005 Stavanger 13.87 SpareBank 1 Næringskreditt 2009 Stavanger 21.92 BN Bank 2008 Trondheim 23.50 SpareBank 1 Kredittkort 2012 Trondheim 17.86 Samarbeidende Sparebanker Bankinvest 2010 Oslo 3.27 SpareBank 1 Mobilbetaling 2015 Oslo 19.70 Investments in joint ventures SpareBank 1 Gruppen 1996 Oslo 19.50 SpareBank 1 Banksamarbeidet 2004 Oslo 17.74

1) Voting rights and ownership share are equal in all companies 118

(Note 38 cont.)

Subsidiaries

Shares in subsidiaries parent bank Investments are recognised at the parent bank's acquisition cost. These items are fully consolidated in the consolidated financial statements.

(Amounts in NOK 1000) Company’s Company's Ownership No. of Nominal Total Total profit for Book 2016 share capital interest in % shares value Assets Liabilities income costs the year value SpareBank 1 SR-Finans 167,000 100.00 334,000 167,000 6,856,713 5,908,519 231,318 55,150 63,044 883,228 SR-Boligkreditt 2,025,000 100.00 2,025,000 2,025,000 30,144,313 28,033,602 120,958 5,543 84,851 2,025,150 Total investments in from financial institutions 2,192,000 37,001,026 33,942,121 352,276 60,693 147,895 2,908,378 EiendomsMegler 1 SR-Eiendom 1,500 100.00 150 1,500 148,051 80,899 349,878 333,723 11,698 97,205 SR-Investering 35,000 100.00 3,500 35,000 170,757 6,193 -153 617 639 164,225 SR-Forvaltning 6,000 100.00 6,000 6,000 65,337 26,802 55,710 27,579 21,097 29,018 SpareBank 1 Regnskapshuset SR 800 100.00 8,000 800 92,693 19,632 81,742 80,140 1,026 70,125 Rygir Industrier Group 14,400 100.00 90,000 14,400 197,045 4,905 13 2,237 -1,555 186,246 Etis Eiendom 62 79 -6 - Finansparken Bjergsted 48,000 100.00 8,000 48,000 272,610 13,849 1,289 328 742 258,016 Total other investments 105,700 946,493 152,280 488,541 444,703 33,641 804,835 Total investments in in subsidiaries parent bank 2,297,700 37,947,519 34,094,401 840,817 505,396 181,536 3,713,213

2015 SpareBank 1 SR-Finans 167,000 100.00 334,000 167,000 7,008,028 6,008,575 235,339 45,273 113,851 811,689 SR-Boligkreditt 1,275,000 100.00 1,275,000 1,275,000 10,753,598 9,449,244 48,670 8,894 28,710 1,275,150 Total investments in from financial institutions 1,442,000 17,761,626 15,457,819 284,009 54,167 142,561 2,086,839 EiendomsMegler 1 SR-Eiendom 1,500 100.00 150 1,500 167,761 92,787 385,888 356,246 20,908 97,205 SR-Investering 35,000 100.00 3,500 35,000 164,773 500 -22,770 807 -18,796 164,225 SR-Forvaltning 6,000 100.00 6,000 6,000 65,698 23,246 59,902 24,052 26,051 29,018 SpareBank 1 Regnskapshuset SR 800 100.00 8,000 800 81,547 10,011 35,526 34,903 345 70,125 Rygir Industrier Group 14,400 100.00 90,000 14,400 207,787 3,228 8,922 20,185 -9,698 191,106 Etis Eiendom 1,000 100.00 10,000 1,000 10,838 1,555 799 792 -96 1,730 Finansparken Bjergsted 16,000 100.00 8,000 16,000 58,274 256 266 350 -83 58,016 Total other investments 74,700 756,678 131,583 468,533 437,335 18,631 611,425 Total investments in in subsidiaries parent bank 1,516,700 18,518,304 15,589,402 752,542 491,502 161,192 2,698,264 119

(Note 38 cont.)

Investments in associated companies and joint ventures (Figures in NOK millions)

Parent bank Group 2015 2016 2016 2015 3,250 3,172 Carrying amount 1 Jan 4,792 4,727 -78 -288 Additions/disposals -259 -77 - - Change in equity 114 44 - - Share of profit/loss 384 422 - - Dividend paid -571 -324 3,172 2,884 Carrying amount 31 Dec 4,460 4,792

- - Share of profit from SpareBank 1 Gruppen 317 251 - - Share of profit from SpareBank 1 Boligkreditt -14 91 - - Share of profit from SpareBank 1 Næringskreditt 22 24 - - Share of profit from BN Bank 61 29 - - Share of profit from SpareBank 1 Banksamarbeidet 2 6 - - Share of profit from Samarbeidende Sparebanker Bankinvest 2 1 - - Share of profit from SpareBank 1 Kredittkort 23 20 - - Share of profit from Admisenteret - - - - Share of profit from SpareBank 1 Mobilbetaling -29 - 189 486 Dividend from SpareBank 1 Gruppen - - 42 21 Dividend from SpareBank 1 Boligkreditt - - 30 22 Dividend from SpareBank 1 Næringskreditt - - 62 40 Dividend from BN Bank - - 1 2 Dividend from Samspar Bank Invest - - 324 571 Total income 384 422

Investments in all the companies are assessed using the cost method in the parent bank and the equity method in the group. Investments in joint ventures in the group as at 31 December 2016 includes goodwill amounting to NOK 23 million (2015: NOK 23 million).

The group’s ownership interests in associated companies and joint ventures (Figures in NOK millions) Lia- Profit or Book value No. of 2016 Assets bilities Income Costs loss 31.12 Stake in % shares SpareBank 1 Gruppen Oslo 12,302 10,783 2,745 2,351 317 1,542 19.50 381,498 SpareBank 1 Banksamarbeidet Oslo 175 150 185 183 2 25 17.74 SpareBank 1 Boligkreditt Stavanger 34,987 33,604 -15 5 -14 1,390 13.87 8,778,079 Admisenteret Jørpeland - 4 50.00 80 BN Bank Trondheim 6,531 5,686 139 52 61 845 23.50 3,317,338 SpareBank 1 Næringskreditt Stavanger 2,990 2,572 27 2 22 422 21.92 3,200,978 Samarbeidene Sparebanker Bankinvest Oslo 23 3 2 - 2 20 3.27 354 SpareBank 1 Kredittkort Trondheim 965 772 92 42 23 193 17.87 515,910 SpareBank 1 Mobilbetaling Oslo - - - -29 18 19.70 1,635 Other investments 1 Total 57,973 53,570 3,175 2,635 384 4,460

2015 SpareBank 1 Gruppen Oslo 11,314 9,762 2,381 2,067 251 1,575 19.50 381,498 SpareBank 1 Banksamarbeidet Oslo 114 92 117 113 6 22 17.74 SpareBank 1 Boligkreditt Stavanger 44,931 43,309 109 6 91 1,638 16.69 9,532,264 Admisenteret Jørpeland - 4 50.00 80 BN Bank Trondheim 7,671 6,847 109 64 29 824 23.50 3,317,338 SpareBank 1 Næringskreditt Stavanger 4,256 3,743 36 3 24 513 26.80 3,913,034 Samarbeidene Sparebanker Bankinvest Oslo 23 3 1 - 1 20 3.27 354 SpareBank 1 Kredittkort Trondheim 949 770 82 44 20 179 18.09 464,107 SpareBank 1 Mobilbetaling Oslo 16 - - - - 16 19.70 1,635 Other investments 1 Total 69,274 64,526 2,835 2,297 422 4,792 120

NOTE 39 MATERIAL TRANSACTIONS WITH CLOSE ASSOCIATES (Figures in NOK millions)

Close associates means associated companies, joint ventures and subsidiaries and people close to executive personnel and members of the bo- ard. The bank's outstanding balances with executive personnel and members of the board are shown in note 22.

Subsidiaries Other Loans 31 Deposits 31 Interest Interest Com- operating Operating 2016 Dec Dec income costs missions income costs SR-Finans 5,675 1 120 - 18 - - EiendomsMegler 1 - 39 3 - - 1 - SR-Forvaltning - 57 - 1 28 - - SR-Investering 6 ------Regnskapshuset SR - 10 - - - - 1 SR-Boligkreditt - 553 44 6 15 - - Rygir Industrier Group - 26 - - - - - Etis Eiendom ------Finansparken Bjergsted - 140 - 1 - - - Total subsidiaries 5,681 826 167 8 61 1 1

2015 SR-Finans 5,831 2 139 - 21 - - EiendomsMegler 1 - 59 2 3 - 1 - SR-Forvaltning - 57 - 1 31 - - SR-Investering - 7 - 1 - - - Regnskapshuset SR - 32 - - - - - SR-Boligkreditt - 706 18 4 - - - Rygir Industrier Group - 27 - - - - - Etis Eiendom - 3 - - - - - Finansparken Bjergsted - 3 - - - - - Total subsidiaries 5,831 896 159 9 52 1 -

Associated companies and joint ventures

Other Loans 31 Deposits 31 Interest Interest Com- operating Operating 2016 Dec Dec income costs missions income costs SpareBank 1 Gruppen 1,692 - 25 - 280 - - SpareBank 1 Banksamarbeidet ------169 SpareBank 1 Boligkreditt 5 425 - 4 145 - - Admisenteret 12 2 1 - - - - SpareBank 1 Næringskreditt - 406 - 5 4 - - Samarbeidende Sparebanker Bankinvest 3 ------SpareBank 1 Kredittkort 770 - 22 - 61 - - Total associated companies and joint ventures 2,482 833 48 9 490 - 169

2015 SpareBank 1 Gruppen 443 - 2 - 269 - - SpareBank 1 Banksamarbeidet ------174 SpareBank 1 Boligkreditt - 2,454 - 11 255 - - Admisenteret 14 3 1 - - - - SpareBank 1 Næringskreditt - 160 - 5 3 - - Samarbeidende Sparebanker Bankinvest 3 ------SpareBank 1 Kredittkort 770 - 25 - 57 - - Total associated companies and joint ventures 1,230 2,617 28 16 584 - 174 121

(Note 39 cont.) Transactions with close associates of the group executive management team 1)

There were no transactions with close associates of the group executive management team.

Transactions with close associates of the board 1)

2016 Loans 31 Interest Other opera- (Figures in NOK thousands) Dec 2) income ting income Birthe Cecilie Lepsøe 170,770 997 - Jorunn Johanne Sætre 315,558 8,924 -

1) Including transactions with close associates and companies in which close associated are key personnel. 2) Inclusive of loan limits, derivatives and guarantees.

NOTE 40 SHARE CAPITAL AND OWNERSHIP STRUCTURE

Share capital SpareBank 1 SR-Bank's share capital amounts to NOK 6,393,777,050 divided into 255,751,082 shares, each with a nominal value of NOK 25. The share capital (formerly equity share capital) was raised in the following manner and on the following dates: Change in share Total share Year capital capital No. of shares 1994 Public issue 744.0 744.0 7,440,000 2000 Private placement with employees 5.0 749.0 7,489,686 2001 Private placement with employees 4.8 753.8 7,538,194 2004 Bonus issue 150.8 904.6 9,045,834 2005 Bonus issue/split 226.1 1,130.7 22,614,585 2007 Rights issue 200.0 1,330.7 26,613,716 2007 Bonus issue/split 443.5 1,774.2 70,969,909 2008 Dividend issue 91.7 1,866.0 74,638,507 2008 Private placement with employees 6.6 1,872.6 74,903,345 2009 Bonus issue/split 374.5 2,247.1 89,884,014 2009 Rights issue/private placement 776.2 3,023.3 120,933,730 2010 Private placement with employees 7.8 3,031.1 121,243,427 2010 Private placement with Kvinnherad 151.7 3,182.8 127,313,361 2012 Conversion limited savings bank 1,804.4 4,987.2 199,489,669 2012 Rights issue 1,406.5 6,393.8 255,751,082

Besides the share capital, the equity consists of the share premium reserve, fund for unrealised gains and other equity.

Dividend policy SpareBank 1 SR-Bank's financial goal for its activities is to achieve results that provide a good, stable return on the Bank's equity, thus creating value for the owners in the form of competitive dividends and a higher share price. Consideration must be given to financial needs, including capital adequacy requirements and the group's targets and strategic plans, when determining the annual dividend. Unless capital requirements dictate otherwise, the goal of the board is to distribute approximately half of the annual net profit for the period as dividends.

Trading in own shares in 2016 No. of Nominal (Figures in NOK thousands) equities value Holding as at 31 Dec 2015 25,398 635 Traded in 2016 83,585 2,090 Holding as at 31 Dec 2016 108,983 2,725 122

(Note 40 cont.)

20 largest shareholders as at 31 December 2016 % Holder of shares ratio Sparebankstiftelsen SR-Bank 72,419,305 28.3% Gjensidige Forsikring ASA 12,308,416 4.8% State Street Bank and Trust Co, USA 7,561,759 3.0% Vpf Nordea Norge Verdi 7,454,497 2.9% SpareBank 1-stiftinga Kvinnherad 6,226,583 2.4% Wimoh Invest AS 5,761,169 2.3% Odin Norge 4,384,644 1.7% Danske Invest Norske Instit. II 3,646,410 1.4% Pareto Aksje Norge 3,065,035 1.2% Verdipapirfondet DNB Norge (IV) 2,963,871 1.2% State Street Bank and Trust Co, USA 2,851,948 1.1% Clipper AS 2,565,000 1.0% State Street Bank and Trust Co, USA 2,247,876 0.9% Verdipapirfondet Alfred Berg Gambak 1,833,914 0.7% KAS Bank NV, The Netherlands 1,804,586 0.7% Danske Invest Norske Aksjer Inst. 1,770,594 0.7% National Insurance Scheme Fund 1,688,000 0.7% J.P. Morgan Chase Bank, USA 1,671,233 0.7% Vpf Nordea Avkastning 1,664,410 0.7% Westco 1,658,537 0.6% Total 20 largest 145,547,787 56.9% Other holders 110,203,295 43.1% Shares issued 255,751,082 100.0%

The total number of shareholders as at 31 December 2016 was 10 428. This is 275 more than at year-end 2015. The proportion of shares held by shareholders resident in Rogaland, Hordaland and the Agder counties was 49.9%, and the proportion held by foreign shareholders was 19.1%. Please also see the overview of shareholders on the board. For more information about SpareBank 1 SR-Bank's share please refer to the special section in the annual report.

20 largest shareholders as at 31 December 2015 % Holder of shares ratio Sparebankstiftelsen SR-Bank 72,419,305 28.3% Gjensidige Forsikring ASA 26,808,416 10.5% State Street Bank and Trust Co, USA 9,670,715 3.8% Vpf Nordea Norge Verdi 8,268,105 3.2% SpareBank 1-stiftinga Kvinnherad 6,226,583 2.4% Wimoh Invest AS 5,761,169 2.3% Odin Norge 5,381,793 2.1% Pareto Aksje Norge 3,944,244 1.5% Danske Invest Norske Instit. II 3,028,258 1.2% State Street Bank and Trust Co, USA 2,990,287 1.2% Clipper AS 2,565,000 1.0% The Bank of New York Mellon, USA 2,542,184 1.0% State Street Bank and Trust Co, USA 2,182,161 0.9% State Street Bank and Trust Co, USA 1,890,186 0.7% Danske Invest Norske Aksjer Inst. 1,674,894 0.7% Vpf Nordea Kapital 1,653,050 0.6% Pareto AS 1,640,867 0.6% Vpf Nordea Avkastning 1,630,410 0.6% Westco 1,577,534 0.6% The Northern Trust Co, UK 1,512,297 0.6% Total 20 largest 163,367,458 63.9% Other holders 92,383,624 36.1% Shares issued 255,751,082 100.0%

The total number of shareholders as at 31 December 2015 was 10,153. This represents a decrease of 269 since year-end 2014. The proportion of shares held by shareholders resident in Rogaland, Hordaland and the Agder counties was 49.8%, and the proportion held by foreign shareholders was 17.3%. Please also see the overview of shareholders on the board. For more information about SpareBank 1 SR-Bank's share please refer to the special section in the annual report. 123

NOTE 41 ACTIVITIES THAT WILL BE SOLD (Figures in NOK millions)

The item includes assets that SpareBank 1 SR-Bank owns as part of its ordinary operations and which it has decided to sell. SpareBank 1 SR-Bank establishes, as part of its business activities, investment projects for sale to its customers. SpareBank 1 SR-Bank must also, as part of its business activities, take over assets, for one reason or another, from its customers. Such assets can also be measured as an activity that will be sold.

2016 2015 Group 1) Owned since Ownership Book value Book value Energiveien Eiendom Holding AS 2) 2008 16.80% 22 22 Book value 31 Dec 22 22

The item is measured at fair value in the financial statements and as operations that will be sold.

1) This note is identical for the parent bank 2) SpareBank 1 SR-Bank does not regard the investment as an associated company since it has no basis for exercising control and the investment is for this reason not recognised according to the equity method.

NOTE 42 IFRS 9 FINANCIAL INSTRUMENTS as well as discussing and deciding on adaptations and the effects of new regulations. IFRS 9 Financial Instruments will replace the current IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 deals with the A description of the new requirements in IFRS 9 and changes from recognition, classification, measurement, and derecognition of the earlier standard is provided below, as is a description of the financial assets and obligations, as well as hedge accounting. IFRS choices SpareBank 1 SR-Bank has made and the status of the 9 will apply from 1 January 2018 and has been approved by the EU. implementation project. The standard may be applied early. SpareBank 1 SR-Bank will not avail itself of this option. Nor will SpareBank 1 SR-Bank show Classification and measurement comparable figures for earlier periods upon implementation of the Financial assets standard on 1 January 2018. According to IFRS 9, financial assets must be classified into three measurement categories: fair value with value changes through In 2015, the SpareBank 1 Alliance put together a multidisciplina- profit or loss, fair value with value changes through other compre- ry implementation team with participants from all of the banks hensive income (OCI) and amortised cost. The measurement that use IFRS. This will prepare for the implementation of IFRS 9 category must be determined upon initial recognition of the asset. ("the Project"). The Project is a steering group with the following In relation to financial assets, a distinction is made between debt sub-groups: instruments and equity instruments. Financial assets are classified on the basis of the contractual terms and conditions for the financial 1. Models and methods assets and the business model used to manage the portfolio of Development of calculation solutions and models for establishing which the assets are a part. unbiased forward-looking estimates of expected losses 2. Strategy, organisation and processes Financial assets that are debt instruments Defining how the organisation of the ongoing work of accounting Debt instruments with contractual cash flows that are only payments in accordance with IFRS 9 will be organised between the of interest and the principal on given dates and that are held in a cooperating banks business model for the purpose of receiving contractual cash flows 3. Accounts and reporting should initially be measured at amortised cost. Instruments with Concretising the actual accounting and notes, including policy contractual cash flows that are only payments of interest and the notes and note templates principal on given dates and that are held in a business model for the 4. Classification and measurement purpose of receiving contractual cash flows and sales, should initially Analysing the group's financial instruments and classifying be measured at fair value with value changes through OCI, with instruments in various categories interest income, currency translation effects, and any impairments presented in the ordinary income statement. Value changes recogni- At the same time, SpareBank 1 SR-Bank has established a local sed through OCI must be reclassified to the income statement upon project for resolving the technical adaptations of new regulations, the sale or other disposal of the assets. 124

Other debt instruments must be measured at fair value with value The preliminary assessment is that the accounting classification will changes through profit or loss. This applies to instruments with cash not result in material balance sheet or income statement related flows that are not only payments of normal interest (time value of consequences. The reason little effect is expected is that, based on money, credit spread and other normal margins linked to loans and the inherent risk in the balance sheet items, there will be little diffe- receivables) and the principal, and instruments that are held in a rence in the measurement between amortised cost and fair value. business model in which the main purpose is not the reception of contractual cash flows. Impairment losses on loans According to the current rules under IAS 39, impairment losses The provisional assessment is that the designation of financial must only be made when objective evidence exists that a loss event instruments at fair value will be of about the same scope as today. has happened after initial recognition. According to IFRS 9 though, impairment losses must be recognised based on expected credit Derivatives and investments in equity instruments losses (ECL). The measurement of the provisions for expected losses All derivatives must be measured at fair value with value changes depends on whether or not the credit risk has increased significantly through profit or loss, however derivatives that are designated hedge since initial capitalisation. Upon initial capitalisation and when the instruments must be recognised in line with hedge accounting credit risk has not increased significantly after initial capitalisati- principles. Investments in equity instruments must be measured on on, provisions must be made for 12 months' expected losses. If the balance sheet at fair value. Value changes shall as a rule be the credit risk has risen significantly, provisions must be made for recognised in the ordinary income statement, but an equity instru- expected losses over the entire lifetime. The method in the IFRS 9 ment that is not held for trading purposes and that is not a conditio- standard entails somewhat greater volatility in impairments and it is nal consideration following a business transfer may be designated as expected that impairments will be made earlier than is the case with measured at fair value with value changes through OCI. When equity the current practice. This will be especially noticeable at the start of instruments are designated at fair value with value changes through an economic downturn. OCI, ordinary dividends must be recognised as income, while value changes should not be posted to the income statement on either an More detailed description of the bank's future impairment model ongoing basis or in the event of disposal. An estimate of losses will be made each quarter based on data in the data warehouse, which contains a history of account and customer Financial liabilities data for the entire credit portfolio. The loss estimates will be calcula- The rules on financial liabilities are generally the same as those ted on the basis of the 12-month and lifelong probability of default in today's IAS 39. As a general rule, financial liabilities should still be (PD), loss given default (LGD) and exposure at default (EAD). The data measured at amortised cost with the exception of financial derivati- warehouse contains a history of observed PD and observed LGD. ves measured at fair value, financial instruments included in a trading This will provide the basis for producing good estimates of future portfolio, and financial liabilities it has been decided to recognise at values for PD and LGD. In line with IFRS 9, the bank groups its loans fair value with value changes through profit or loss. into three stages.

Hedge accounting Stage 1: IFRS 9 simplifies the requirement for hedge accounting in that This is the starting point for all financial assets covered by the general the hedging effect is tied more closely to the management's risk loss model. All assets that do not have a significantly higher credit manage­ment and provides greater room for judgement. The requ- risk than they did upon initial recognition will have a loss provision irement for hedge effectiveness of 80-125% has been eliminated equal to 12 months' expected losses. This category will contain all and replaced with a more qualitative requirement, including the fact assets that have not be transferred to stages 2 or 3. that there should be a financial connection between the hedging instrument and hedged item, and that the credit risk should not Stage 2: dominate the value changes of the hedging instrument. According to In stage 2 the loss model is assets that have seen a significant rise IFRS 9, a prospective (forward-looking) effectiveness test is sufficient, in credit risk since initial recognition, but that do not have objective while hedge effectiveness pursuant to IAS 39 must be assessed both evidence of a loss event. For these assets the loss provision must prospectively and retrospectively (backwards-looking). Hedging cover expected losses over the lifetime. This group contains acco- documentation is still required. The bank is still assessing the scope unts with a significant degree of credit deterioration, but which on of the use of hedge accounting, but the provisional assessment the balance sheet data belong to customers that are classified as is that hedge accounting of about the scope as today will be healthy. As far as the demarcation with stage 1 is concerned, the continued. bank bases its definition of a significant degree of credit deterioration on the extent to which the commitment's calculated probability of Other factors default (PD) has increased significantly. The bank will continue to finalise the assessment of the following selected issues with respect to classification: Stage 3: • Current loans In stage 3 the loss model is assets that have seen a significant rise in • Loans with a fixed-rate and right to early redemption credit risk since being granted and where there is objective evidence • Sales of loans to wholly or part-owned mortgage companies of a loss event on the balance sheet date. For these assets the loss • Syndicated loans provision must cover expected losses over the lifetime. These are • Loans with significant differences between the benchmark rate assets that are defined under the current regulations as non-perfor- and frequency of rate fixing ming and impaired. 125

Further development of the model Quantitative effects of implementing IFRS 9 The impairment model is still under development. The bank is Based on a preliminary review, the transition to IFRS 9 is not assessing forward-looking information like macroeconomic factors expected to have significant effects. This applies to any effects such as unemployment, GDP growth, interest rates and house associated with a change in classification and measurement, as prices, and economic forecasts in order to provide forward-looking well as a change in methods linked to impairment losses. information that is as correct as possible. The model will calculate The effect on the capital adequacy ratio will, according to our impairments based on data at the end of the month. preliminary calculations, be limited or non-existent as a consequen- ce of the deduction provisions associated with regulatory expected Effect on financial reporting losses since the group's total impairments are lower than these. Any implementation effects will be recognised against equity upon Given this, it therefore does not appear that SpareBank 1 SR-Bank the switch to IFRS 9 on 1 January 2018. The provisional review of the will require a 5-year implementation period, which the capital future disclosure requirements indicates there will be some changes adequacy regulations allow. in disclosure requirements relating to impalement losses, but little effect in relation to notes for financial instruments.

NOTE 43 EVENTS AFTER THE BALANCE SHEET DATE

As at 31 December 2016, SpareBank 1 SR-Bank owned 19.7% of the shares in SpareBank 1 Mobilbetaling AS (mCASH). On 13 February 2017, it was announced that more than 100 Norwegian banks would beco- me part-owners of Vipps together with DnB. This includes the banks in the SpareBank 1 Alliance with their mobile payment solution, mCASH. The SpareBank 1 Alliance will own 25% and become the second largest owner of the new company after the DnB Group, which will be the largest owner with 52%.

No material events have been registered after 31 December 2016 that affect the annual financial statements as prepared.

The proposed dividend is NOK 2.25 per share and will total NOK 575 million. To the General Meeting of Sparebank 1 SR-Bank ASA Independent Auditor’s Report Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of Sparebank 1 SR-Bank ASA, in our opinion:

• The financial statements are prepared in accordance with the law and regulations.

• The accompanying financial statements give a true and fair view of the financial position of the parent company as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

• The accompanying financial statements give a true and fair view of the financial position of the group as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.

The financial statements comprise:

• The financial statements of the parent company, which comprise the balance sheet as at 31 December 2016, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and

• The financial statements of the group, which comprise the balance sheet as at 31 December 2016 and income statement, statement of changes in equity, cash flow for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

Basis for Opinion

We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, included International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company as required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

PricewaterhouseCoopers AS, Kanalsletta 8, Postboks 8017, NO-4068 Stavanger T: 02316, org.no.: 987 009 713 VAT, www.pwc.no State authorised public accountants, members of The Norwegian Institute of Public Accountants, and authorised accounting firm Auditor's Report - 8 March 2017 - Sparebank 1 SR-Bank ASA

Key Audit Matter How our audit addressed the Key Audit Matter

Impairment losses of loans and guarantees We addressed and tested the key controls related to the impairment process. The objective of these controls are We focused on the valuation of loans to to identify whether loans have objective evidence of customers because management exercise impairment, and how the impairment losses should be significant judgement in the impairment calculated when objective evidence exists. We process. In addition, loans and concluded that we could rely on these controls in our guarantees constitute a considerable audit. amount of the assets on the balance sheet. Throughout 2016, we held meetings with the credit and The bank’s procedures and control legal department in the bank. In these meetings, we systems related to credit rating and challenged the bank’s assessments, including possible monitoring process are central to the impairment indicators on loans where there is not yet valuation of loans. The use of judgement objective evidence that impairment exists. This could affect the financial result, and affect included loans that were assessed by the bank and the bank’s capital adequacy requirements loans selected based on industry, size, risk and due to the credit rate classification of haphazardly. We assured that the bank had particular loans. attention on loans in the petroleum related industry. According to accounting standards, the For loans where objective evidence exists, we bank shall assess, at the end of each challenged the bank and examined the relevance and reporting period, whether there is the reasonableness of the assumptions and the method objective evidence that impairment exists used in the calculation of realisable value. Our for the loans. If there are, the losses procedures indicate that the bank’s assumptions and should be calculated as the residual of the methods were reasonable. book value less the present value of future We performed credit assessments for a sample of loans, cash flows. Both assessments involve where we evaluated whether objective evidence for significant judgements. impairment losses exist. We also assessed the realisable In our audit, we gave special attention to: value the bank had calculated. These values are calculated by using internal and external appraisals.  Managements’ process to identify The results of our testing of individual impairment loans with objective evidence that losses were that management had used reasonable impairment exists. assumptions in the calculation of the impairment  Managements’ process to amounts. monitor engagements that are For loans considered on a collective basis the particularly exposed due to the calculation of impairment is performed by the credit decline in the petroleum related risk manager based on a framework model. We tested industry. the model and considered the relevance and the  Managements’ assumptions used reasonableness of important assumptions used in the in calculating the impairment calculation. The level of collective losses were among amount for loans where others compared to other comparable banks and impairment exists. analysed towards the bank’s other loan portfolio. We concluded that the assumptions used in the calculation Refer to note 6, 8, 10, 11, 12, 13 and 14 in of the impairment amounts were reasonable. the annual report for the group’s credit risk and impairment of loans to We satisfied ourselves that disclosures regarding customers. valuation of loans and guarantees, appropriately describes risks in the portfolio.

(2) Auditor's Report - 8 March 2017 - Sparebank 1 SR-Bank ASA

IT-systems and the underlying systems for processing transactions We have addressed this area because it is The bank uses external service providers to operate important for the bank’s financial some of the important IT systems. The auditor at the reporting systems, and their business relevant service organisation evaluates the design and model is dependent on complex IT efficiency of the established control systems, and tests systems. Weaknesses in automated the controls designed to ensure the integrity of the IT processes and controls can potentially system and cash handling that are relevant to financial lead to a significant risk in the daily reporting. operations and risk of misstatements. We satisfied ourselves regarding the auditors objectivity and competence and examined the reports and evaluated possible misstatement and improvements. Furthermore, our own IT specialists have tested access controls to the IT systems and the segregation of duties where necessary for our audit. Our work gave us sufficient evidence to enable us to rely on the operation of the Group’s IT systems relevant for our audit.

Completeness and valuation of derivatives Derivatives consist mainly of interest- The bank has established processes and controls to and currency instruments. The bank uses ensure accurate registration and measurement of derivatives to reduce interest and derivative contracts. exchange risk related to fixed-rate We tested the bank’s control over the entering into and funding and loans to customers, bonds closing of derivative contracts in the banks systems. (assets and liabilities) and certificates Our audit also includes tests to ensure that the bank (assets and liabilities). The bank has also reconciles transactions with counterparties on a daily a significant trade of derivatives on behalf basis. Furthermore, we have tested the banks of customers. There is a risk of errors in methodology and controls regarding pricing models. the financial statements if derivatives are We concluded that we could rely on these controls in not accurately registered in the banks our audit. systems. Interest and exchange curves were on a daily basis fed Derivatives are measured at fair value, into the bank’s portfolio system as basis for pricing of and the valuation techniques depend on derivatives. We tested the pricing by recalculating the management judgement. The use of pricing of different derivatives by using the same assumptions (interest rates and credit interest and exchange curves as the bank. We spread) can therefore potentially affect compared these prices to external sources. The result of the income statement. our testing show that management used reasonable Refer to note 2, 3, 6, 15, 16, 21, 26 and 28 assumptions when calculating the fair value of the for the description of the Groups risk derivatives. governance and use of derivatives.

Other information

(3) Auditor's Report - 8 March 2017 - Sparebank 1 SR-Bank ASA

Management is responsible for the other information. The other information comprises the Board of Directors’ report, statements on Corporate Governance and Corporate Social Responsibility, but does not include the financial statements and our auditor's report thereon.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors and the Managing Director for the Financial Statements

The Board of Directors and the Managing Director (management) are responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, included International Standards on Auditing (ISAs), we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. We design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

(4) Auditor's Report - 8 March 2017 - Sparebank 1 SR-Bank ASA

• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

(5) Auditor's Report - 8 March 2017 - Sparebank 1 SR-Bank ASA

Report on Other Legal and Regulatory Requirements

Opinion on the Board of Directors’ report

Based on our audit of the financial statements as described above, it is our opinion that the information presented in the Board of Directors’ report and statements on Corporate Governance and Corporate Social Responsibility concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations.

Opinion on Registration and Documentation

Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the company’s accounting information in accordance with the law and bookkeeping standards and practices generally accepted in Norway.

Stavanger, 8 March 2017 PricewaterhouseCoopers AS

Torbjørn Larsen State Authorised Public Accountant

Note: This translation from Norwegian has been prepared for information purposes only.

(6) 132

Statement by the Board of Directors and Chief Executive Officer

We hereby confirm that the financial statements for the period 1 We also confirm that the Report of the Board of Directors provides January to 31 December 2016 have, to the best of our knowledge, a true and fair presentation of the performance, result and position been prepared pursuant to applicable accounting standards, and of the company and group, together with a description of the most that the information provided presents a true and fair picture of the important risk and uncertainty factors that the company and the company's and the Group's assets, liabilities, financial positions and group face. profit as a whole.

Stavanger, 8 March 2017

Dag Mejdell Chair of the board Kate Henriksen Tor Dahle

Birthe Cecilie Lepsøe Jorunn Johanne Sætre Odd Torland

Sally Lund-Andersen Kristian Kristensen Arne Austreid Employee representative Employee representative Chief Executive Officer

134

KEY FIGURES LAST 5 YEARS (Figures in NOK millions)

SpareBank 1 SR-Bank Group 2016 2015 2014 2013 2012 Summary of results Net interest income 2,871 2,593 2,404 2,119 1,742 Net commissions and other operating income 1,443 1,532 1,732 1,824 1,466 Net income from financial investments 654 304 778 555 578 Total net income 4,968 4,429 4,914 4,498 3,786 Total operating costs 2,032 1,863 2,056 2,019 1,888 Operating profit before impairment losses on loans 2,936 2,566 2,858 2,479 1,898 Impairment losses on loans and guarantees 778 420 257 132 137 Pre-tax profit 2,158 2,146 2,601 2,347 1,761 Taxes 403 400 506 487 400 Net profit for the year 1,755 1,746 2,095 1,860 1,361

Return (% of average total assets) Net interest income 1.48% 1.42% 1.45% 1.42% 1.27% Net commissions and other operating income 0.74% 0.84% 1.04% 1.22% 1.07% Net income from financial investments 0.34% 0.17% 0.47% 0.37% 0.42% Total net income 2.56% 2.42% 2.96% 3.01% 2.76% Total operating costs 1.05% 1.02% 1.24% 1.35% 1.38% Operating profit before impairment losses on loans 1.51% 1.40% 1.72% 1.66% 1.38% Impairment losses on loans and guarantees 0.40% 0.23% 0.15% 0.09% 0.10% Pre-tax profit 1.11% 1.17% 1.57% 1.57% 1.28% Taxes 0.21% 0.22% 0.30% 0.33% 0.29% Net profit for the year 0.90% 0.96% 1.26% 1.24% 0.99%

Balance Sheet figures Lending to retail market 91,171 87,229 77,651 59,848 52,569 Lending to retail market, incl. SB1 Boligkreditt 115,348 115,397 109,939 105,595 100,786 Lending to corporate market 66,497 66,705 62,880 59,128 55,723 Lending to corporate market, incl. SB1 Næringskreditt 67,014 67,243 63,464 59,770 56,194 Retail market deposits 42,908 42,101 39,545 36,190 34,311 Corporate market deposits 43,741 47,341 41,942 35,474 33,248 Lending growth in retail market, excl. SB1 Boligkreditt % 4.5 12.3 29.7 13.8 10.5 Lending growth in corporate market, excl. SB1 Næringskreditt % -0.3 6.1 6.3 6.1 6.0 Percentage growth in retail market deposits 1.9 6.5 9.3 5.5 9.1 Percentage growth in corporate market deposits -7.6 12.9 18.2 6.7 2.1 Total assets 193,408 192,049 174,926 156,985 141,543 Average total assets 194,264 182,768 166,017 149,554 137,212

Impairment losses on loans and non-performance Impairment as % of lending 0.50 0.28 0.20 0.12 0.13 incl. loans SB1 Boligkreditt and SB1 Næringskreditt 0.42 0.23 0.15 0.08 0.09 Non-performing commitments as % of gross loans 0.68 0.55 0.30 0.69 0.42 incl. loans SB1 Boligkreditt and SB1 Næringskreditt 0.59 0.46 0.24 0.50 0.29 Other impaired commitments as % of gross loans 0.72 0.35 0.36 0.37 0.54 incl. loans SB1 Boligkreditt and SB1 Næringskreditt 0.62 0.30 0.29 0.26 0.37

Equity Share capital 6,394 6,394 6,394 6,394 6,394 Share premium reserve 1,587 1,587 1,587 1,587 1,587 Other equity 10,307 8,933 7,422 6,075 4,656 Total equity 18,288 16,914 15,403 14,056 12,637

Profitability, financial strength and staffing Return on equity % 10.0 10.8 14.2 14.0 12.4 Cost/income ratio 40.9 42.1 41.8 44.9 49.9 Common equity tier 1 capital ratio % 14.70 13.26 11.50 11.11 10.01 Tier 1 capital ratio % 15.63 14.17 12.34 12.83 12.15 Capital ratio % 17.52 16.73 14.53 14.07 13.10 No. of full-time equivalents 1,127 1,161 1,106 1,165 1,207 135

Profit and loss ern on eiy NOK million 3 000 15%

2 500 2601 12% 2347 2 000 2146 2158 9% 1761 1 500 6% 1 000 778

420 3% 500 257 137 132 0 0% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Operating profit Losses on loans Return on equity before tax and guarantees

iy nd sbordined lons ross lons nd deposis NOK million NOK million 25 000 200 000 20 000 150 000 15 000

100 000 10 000

50 000 5 000

0 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Share capital Share premium reserve Gross loans, incl. Boligkreditt and Næringskreditt Other equity Subordinated loans Deposits

perin coss s o vere ol sses Ts rop

1,6% 1 240 1 220 1,4% 1 200 1,2% 1 180 1,0% 1 160

0,8% 1 140 1 120 0,6% 1 100 0,4% 1 080 0,2% 1 060 0,0% 1 040 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Operating costs FTEs Our aim is to stimulate growth and development in the region

Switchboard 02002 for retail customers 02008 for corporate customers

Head office/administration Bjergsted Terrasse 1 P.b. 250, N-4066 Stavanger Email retail customers: [email protected] Email corporate customers: [email protected] Fax no. +47 51 57 12 60

For the business hours and full addresses of our branches please see www.sr-bank.no